This is horrible. A few years ago I realized my parents were way behind on savings and just incessantly nagged them until they got on a good plan. They kicked and screamed the whole time ("You're our son. You can't tell us what to do."), but it's turned out to be one of the best decision I ever made. Next year they are actually going to retire. I dunno what I'd do if they had to work at Wal-Mart just to make ends meet.
Recently, I made this visualization of how US social security benefits are calculated:
I thought about that but it makes the visualization much more complicated and, moreover, would require forecasting wages way out into the future to be relevant to a millennial. If you had tried to do some wage forecast in 1970 you would've gotten things very wrong, so maybe the same is true today. One day I will add this feature but not soon.
By "a few years" I mean about ten or eleven years ago. Fortunately, that means they bought most of their stocks since 2008 and have gotten great returns. They were also fortunate to buy a house in a good neighborhood during the bottom of the slump, and to live in a cheap state. So they can sell their house and almost pay cash for a modest house a little further out from the city. Fortunately, the city has relatively low traffic so even in the country they can get to a great hospital within 20 minutes. The state also has basically no property tax for seniors, which I think is questionable policy but very good for them.
They aren't wealthy by any means, like the retirees out here in California who have a million dollars (or several). But between their stocks, the home equity, the two social security checks and a small pension my dad got from spending time at a job at the city government they'll be alright.
Good for them, but do you see how this is essentially a gamble? Had they done the same 5-6 earlier they'd have lost a lot in both investments and real estate in 2008.
Yep they are lucky. The stock market is a gamble in the short run. Even a home is a gamble sometimes. But to me what was important is that they started putting away a much larger share of their income; even negative returns are better than blowing your money on boats or SUV's or a timeshare or gold coins or alaska cruises or whatever stuff TV tells older people to buy. I think the main effect of the stock market doing well wasn't so much to give them returns as to make them super excited about investment; so they scrimped and saved a lot more because it was fun to see their numbers go up so fast. They also worked harder at their jobs (both are self employed) to make more money to put in their retirement fund.
It's also easy to shield yourself from massive losses through diversification. Vanguard even had someone talk them through selecting funds, even when they didn't have much money to invest. I also got them to pay off loans (cars, credit cards), which is the safest investment you can make for the returns.
I should also emphasize that, having started so late, stocks could never be their primary source of income. At a reasonable withdrawal rate I think they'll get about about $15-25k per year. Most of their income will still be from social security. But on a long enough time scale one of them will get senile or cancer or something, and we'll thank god for that big pile of money when it's time to hire help.
Recessions like 2008 are part of the normal ebb and flow of the markets, and we're likely heading into another one (though hopefully not quite so bad). 5-6 years earlier wouldn't have made a noticeable difference unless they were planning on retiring between 2008-2012ish, the markets have recovered after all.
Personally, if I see the stock market dip like that again I'm going to double down on my 401(k) contributions.
I already put a healthy amount into my 401(k), my employer matches $1.20 for every $1 up to 6% of my wages plus I usually get another 4% of my salary put in every April as a profit sharing bonus. I could put more in, but I’m trying to pay off debt and save for a house so that takes priority - even then I may invest in my brokerage account first to have semi-liquid assets available if something major happens and I need access to more money than I have in savings while not locking everything up in low APY hell.
If timing the dips would work consistently there wouldn't be any dips because everyone would take the risk free return until there is no risk free return left.
Of course not consistently. Just, if something becomes conventional wisdom in investing all of a sudden, there might be contrarian opportunities for a little while.
> The average life expectancy in 1950 was 68, meaning that a pension had to pay out only three years past the typical retirement age of 65. Today, average life expectancy is about 79, meaning that the same plan would have to pay out 13 years past typical retirement age.
That's the wrong statistic to use and completely wrong conclusion.
Life expectancy _for a 65 year old_ person in 1950 was another 13.9 years. That rose only to 19.1 years in 2010 (newest number I found at a glance).
All the babies and people dying before age 65 reduce the average life expectancy drastically, but have no bearing on pension payment length.
All the people dying before 65 absolutely do have a bearing on pension payment length: If an employer promises someone a pension at 35 and they don't live long enough to collect then the employer doesn't have to fund that commitment. Using life expectancy at 65 would only be valid if the pensions were being promised only to those who had already lived to 65 and at the time they were 65.
Both are good points. It would probably be more accurate to use life expectancy at 25... so it starts around the time people start their careers, and it excludes all children deaths (who never contributed). If we did that, it's an increase from 71.5 to 80 (more than doubling retirement years, from 6.5 years to 15).
This is totally an important factor for the pension provider, your are right about that. They will factor in how many people will never reach the payout age, the distribution of payout age, maybe if the spouse is covered too how long they might live, how may people switch their jobs and forfeit the pension etc.
I'd argue this has an impact on the "savings rate" per employee, but not on the average payout length.
> I'd argue this has an impact on the "savings rate" per employee, but not on the average payout length.
Your argument is only correct if we define the average payout length to only factor in those employees who receive at least one check. However the original quote that you claimed was wrong is referring how much the pension has to pay out on average, which is not limited to those who live long enough to collect a payout. Their average payout length of 3 years factors in a whole bunch of $0 payouts, whereas your average ignores all of the zeros.
I follow your argument, but I think that's certainly not what the author of the article was intending.
And that's a very hard number to come by, because as I've argued you would have to factor in all other reasons why a pension might have to be paid out longer or not at all.
Certainly "3 years of average payout" must be completely and utterly wrong because this number includes infants etc which were never employed. Infant and child mortality has an enormous impact on average life expectancy.
I don’t know about what the pensions from the 50s and 60s but modern pensions have dependency clauses. Based on that the majority of those pensions would pay out. If the pensioner dies their spouse will collect from retirement or 65. If they have no spouse but children the children can collect until 18.
I'm not sure it's quite as wrong as you say though. If the reason the life expectancy of a 65 year old is higher is that they are post-selected for not having died earlier, then it's the case that there were a bunch of people paying social security taxes that were dying before retirement. So there was more money for each one of those 13.9 years, because the people who survived were still able to use the cash put in by those that didn't. If you converted this into some figure that represented how many person-years of retirement the taxes from the average career supported, it would be closer to the three years, not the 13.9 years.
It's not a coincidence. The same .1% on 99% class warfare caused retirement age to be raised and life expectancy to be lowered.
The "pension affordability crisis" was patently never actually about pension affordability. If GDP goes up 400% since the 1960s while dependency ratios go up a mere ~15%, there's clearly something else going on.
That thing was a politically directed wealth transfer from poor to rich.
I think you're missing the point. Someone who dies at birth brings down the average life expectancy but does not affect pension funding at all. Read the other comments for more examples.
Then corporate America changed: Union membership waned. Executive boards, under pressure from financial raiders, focused more intently on maximizing stock prices. ...
Exactly what led corporate America away from pensions is a matter of debate among scholars, but there is little question that they seem destined for extinction, at least in the private sector.
Oh, please. Nobody seriously debates this, the answer is right there. The policy of the federal government, since Reagan, has been to bust the power of unions every chance they get. Just look at the decisions of the NLRB before and after Reagan.
Labor lost power, corporations gained it. First pensions were reduced, then deliberately underfunded, then raided, then eliminated. The government went along with all of that.
I second this. We have access to vastly more powerful technology than in 1980 and the GDP of most developed countries is many times what it used to be. We should all be earning at least twice what we did, and we should be working fewer hours, with more benefits. The retirement age should be 60 or even 55 today, maybe younger, and social security should have kept up with inflation to pay more.
All of this would have happened with unions and deciding in favor of labor whenever possible. Instead we did the opposite, and here we are in an unsustainable class war with the ugliest aspects of our past coming back to haunt us.
I am all for ending labor as we know it and letting machines do most of the work. But humans must still be in charge, not capital/corporations/sociopaths/liars/lobbyists and so on.
What you say is correct, but pensions are inherently risky to companies. There are two prime sources of risk: The stock market and retiree statistics. If either turns south, the company is required to make up the difference, which can cause smaller companies to fold. When both the stock market and retiree statistics were stable, companies were happy to provide pensions. But both (especially the stock market) are too volatile nowadays for pension plans to be viable. The only solution now is for the federal government to cover the unpredictability of planning for retirement.
World Economic Forum estimates retirement shortfalls in public pension/private pension/individual savings in 2015 at 70 trillion$, and projects nearly half a quadrillion (400 tril) shortfall in 2050, with the lion's share belonging to the US. [1, page 7] Interest rates stuck at the 0 bound (and negative real) for nearly a decade haven't helped. I foresee a bumpy ride figuring out who gets stuck with the bill.
This paper seems to assume life expectancy will increase indefinitely but this doesn't seem like it will happen due to the fact roughly 2/3 of people are overweight or obese.
Why will the world be so much worse off at 400 trillion instead of 70 trillion?
Presumably “the world” will have many many more folks making more money by then given the rates of economic growth in third world countries. 10B people can cover 400T in 10 years paying just $10 a day.
These "company managed" pension schemes have always fascinated me and would seem ripe for corruption / raiding by the company if they're short a few $$$.
Seems like in Australia we're in a pretty good position with "superannuation" https://en.wikipedia.org/wiki/Superannuation_in_Australia being compulsory since 1992 and is typically managed by completely unrelated parties to your employer.
The payments are generally made directly by your employer into the fund of your own choosing.
The biggest thing is once you've had this contributed to YOUR account, it is YOURS (drawable from age 65) and doesn't matter what happens to the fortunes of your employer(s) in the future.
My dads pension plan was raided in exactly that manner. Thankfully, his union took care of it for them, hiring a shark of a lawyer who got it refunded by fining the hell out of the executives and the company for their illegal actions.
Of course, he also inherited thousands of acres of land, so he’s not exactly in a bad place had it not been funded again.
I think your usage of "raid" is not what is being discussed here. The meaning here is when companies get in trouble, they use loopholes (or downright evil language) in their retirement plans to essentially take the money from employees.
But its an awful DC scheme you cant put much in there is zero tax relief an employer Mach is tiny the UK from April mandates 5% match for an employer -better than nothing I supose
In the UK due to some scandals in the past (Robert Maxwell) the pension schemes I know about have independent trustees nominated or elected by employer and employees who have to follow a legal scheme of arrangement and are also audited.
The problem with a lot of pension fun is the accountancy industry have set unrealistic rules for how you define the liability this handing the employer an excuse to close the schemes - I have had an off the record briefing for one scheme this was over a change from RPI to CPI.
At this meeting a trustee commented the worst case scenario that you have to allow for was one where the economy had effectively collapsed and making sure that you had a stockpile of canned good and shotgun shells would be more important that receiving a pension check :-)
IMO a major issue is the expectance of someone else to take care of "me". I know that I'm retired for ~30 out of 80 years of my life and thus have to save ~3/8ths of my income, else starve. (Yes, some modifiers for tax brackets, compounding blah blah...)
In the past people's children were the "investment" that paid the dividends into old age. Now we no longer have children to bear the burden. Yet we spend the normally sacrificed dollars on lattes, world travel, iphones (and whatever icon of excess you choose).
I realize many people say its "hard" to save these days. But I also think there is some spectrum involved with doing what pays vs what one "wants" and ensuring one's lifestyle matches their actual ranked income in a society. (ie, if you earn on the 10th percentile, then you probably should be spending on the 10th percentile on dinners out or whatever icon of excess you want to pick on.)
I hear a lot about the nickel and dime stuff on how to save, but most people get eaten up by interest on home and education loans and medical costs. The other issue is interest rates being so low it amounts to a war on savings that neither party seems to willing to do anything about.
He would feel great now. Just wondering his attitude when his "savings" dropped ~50% 2008-2009. Most people can't handle saving a million dollars over 25 years and have it drop in half over 6 months. The pain is too much. Avoiding this situation (and other reasons) is why pensions are better for most people.
Jobs are a huge motivation in paying for the retirement of our senior citizens. The more people we can get to go into retirement the more jobs are open for the younger generations, and then we also get the societal feel good of taking care of the elderly after they've (likely) worked their butts off for 40+ years.
Well, at least until the robots come - then retirement will be the least of our issues.
So for the 10th percentile of earners dinner is an excess? Does this income allocation apply in the other direction? If I start selling $10,000.00 chicken sandwiches should the top earners by income buy from me because that's their place?
Defined benefit plans are unaffordable, whether for a company or a government. But while defined contribution actually generate great returns, they have the problem that urgent expenses always crowd out saving, particularly for lower income groups (same as it would if income taxes were collected annually, or less frequently).
Seems like the optimal solution is to combine the compulsory contribution part of the current social security system with a defined contribution system that can actually generate the income that will be needed.
As far as I can tell, the pension system in Chile in the 80’s and 90’s was like this, and had the additional benefit of generating large amounts of investment capital during its operation which helped economic growth.
Why are defined benefit plans always unaffordable?
You don’t want people’s retirements to be affected by the value of their investment at the moment of withdrawal. Instead you want the benefit to incorporate the expected value at retirement of the investment over the long run.
The problem with many pensions is that the businesses themselves supporting them essentially went belly up as competition, technology and investors took their toll.
This is a good point. DC is no more “unaffordable” inherently. DC puts the volatility of upside and downside shocks on the individual (or more practically an age cohort) versus smoothing it out over wider age cohorts. For example, I have lots of savings. The market up 20% this year is great for me. Not so much for the next age cohort who face mathematically lower returns from this level. If anything DB at the margin forces more realistic upfront accounting (despite pension accounting flaws) because when an entire age cohort faces ruin they will vote to socialize much of the pain anyway ex post.
Some modern defined benefit schemes do that -- give a formula for the total dollar value you'll receive at retirement. And if you want to convert that to a pension you buy an annuity with it.
However, they seem (to me) to have a couple of problems -
- as the formula is often based on your last five years' average salary, it seems like an "all eggs in one basket" on your salary growing. Which seems to be the inverse of the sort of hedging and diversifying you try to do with personal investments -- if my salary grows I already gain, but I'd like my retirement savings to grow even if for any reason my salary stalls in 20 years' time.
- the formulas seem to be quite fixed and can have some perverse incentives. For instance, "average salary from the last five years" seems (to me) to be partly behind why Vice Chancellor roles changed so much -- someone stepping back from being a VC to being a professor would face a salary drop, which would then affect their defined benefit pension calculation (costing them a lot of money), so it became "up or out" and the idea of university leadership roles as being a service role that academics would take on for a while simply died because it had to be the last role you took before retirement. Ok, that's a bit of an aside about how pension schemes can change the nature of the university, but practically speaking I'd like to keep the option of doing things like semi-retiring at the end of my career (dropping to part-time or doing something interesting that might not increase my salary) without incurring a massive penalty on my retirement savings.
For company plans, you said the answer. It's silly to assume that your employer will be alive when you are 80 year sold, and also seems like a stupid idea for a company in a completely unrelated business to get into the retirement fund mgmt business.
For states, the reason is population. If your pop doubles every 50 years, then you only need 2 young people to pay for one retiree. If it's the opposite (Japan now, US in a few decades), then you are screwed.
There's a huge problem with defined contribution plans that isn't in defined benefit plans: the contributions belong to the retiree and get inherited by their children, rather than helping fund seniors as a class.
Ideally you'd want some sort of tontine-like features, where people receive mortality credits based on their contributions and actuarial tables for their age. It'd mean that saving enough for retirement is much more economically feasible.
If you annuitize your 401k balance at retirement you're effectively participating in a Tontine-like structure with fees paid to the insurance and reinsurance companies in return for administration and risk mitigation.
Indexed annuities are crap, single premium inflation-indexed annuities are pretty much the ideal product but not enough people are buying it for it to be offered, and buying a flat single-premium immediate annuity has some execution problems with dealing with inflation properly. There's significant execution hurdles with this plan.
And like, yeah, this solves the problem for me, but I'm already a high-income earner who is financially literate enough to reason through these things. Having it be opt-out or mandatory solves this for the people who aren't as lucky.
Ah no it all depends on the accounting rules which have been fiddled by using unrealistic assumptions a lot of the DB deficits in the UK would not be as huge (and affordable) or actually be in profit if more realistic accounting rules where in place.
Ask yourself who benefits when you see scare stories about pensions
> Years ago, Coomer and his co-workers at the Tulsa plant of McDonnell-Douglas, the famed airplane maker, were enrolled in the company pension, but in 1994, with an eye toward cutting retirement costs, the company closed the plant.
Did the McDonnell-Douglas company not pay into a separate pension fund, or did they raid the fund somehow?
It sounds like by closing the plant and stopping the employees reaching retirement age, they massively reduced the amount the employees were eligible to receive. Even if the pension fund was separate, by reducing eligibility this way they company had to pay less into it over the following years.
To add to that, this pension (and many others) was structured such that payouts are non-linear based on number of years worked, so for example, you might get:
0-5 years worked: no pension
5-10 years worked: 5% pension
10-20 years worked: 20% pension
30+ years worked: full pension
By preventing workers from being able to work the full 30+ years, they never had to pay the full pension. One of the workers in the story mentions receiving 1/5 of full pension after being laid off due to the closure.
The popular marketing reason why the pension disappeared is the factory closed.
The real reason the pension disappeared is the proposed vesting duration was ridiculous. I am older so current jobs have no pension of course, but when I worked jobs with pensions, the vesting duration was typically something like 3 to 5 years for 100% vesting, sometimes only 2 years for 50% vesting. In fact I have a pension from a previous employer projected to be worth $800/month which by then will be about the price of one cup of starbucks coffee...
To make it crystal clear, the pension was eliminated when the vesting duration was moved from perhaps 4 years to 30+ years.
Thanks for replying. I found an article about "vesting duration" for US pensions, and if I'm understanding correctly this means that after you leave the job for <N> years, the pension you are entitled to drops to half and (after more years) completely disappears. This seems incredible to me! Surely this would mean that younger workers who work for a company even for a long time but then leave would never collect a pension from that company?
More like if you work somewhere for enough years, you'll the golden handcuffs of extra bonus, or the flip side if you quit each job after two years you get nothing.
And this detail - someone working 27 year for the company and only getting 20% of the full benefit - doesn't make these pensions really attractive. And in the article they even call it a "more generous types of pensions".
I know most of the DB plans were structured in a similar way, i.e. earlier years with the company have less impact on the overal pension. But this one looks more like a lottery, where you bet to stay employed at the same company for 30 years no matter waht.
Terrible spot to be in, hoping I will avoid it with a traveling retirement plan (401k). How do other 1st world countries manage elderly workers/people that should no longer work? SS is an option and I don't believe it will go bankrupt, wages of about 125K contribute to SS, anything larger does not. Just have to adjust that limit to keep it where it needs to be. So that helps a little bit.
It varies vastly by country. In France, the state calculates a percent of your income during the 4X years you were working and gives you that as a pension. The estimation can be pretty complicated, but that's fair enough for a one line explanation.
The system will collapse eventually. More and more elderly to support by less and less active workers. The younger population is suffering from vast unemployment (25%) and they will never achieve 40 years of continuous work in their lifetime.
> The younger population is suffering from vast unemployment
It appears there is a lot of work to be done and a lot of idle workers to do it. The fact that both can exist in tandem seems like an indictment of how horribly inefficient our economic systems currently are.
Not sure what you mean. Retirees don't create jobs. They just get money handed to them monthly as promised by the pension formula decided decades ago. (that money is supposed to come from taxes on active workers's salaries)
The whole system collapse when taxes are not enough to cover the pensions that were promised. It's a ponzi scheme.
That’s a problem of demographics and unemployment, not a Ponzi scheme. Ponzi schemes are scams, but they do effectively take money from people and give it to other people, which doesn’t happen if there’s no funds to transfer.
I don’t think any country can sustain a 25% unemployment rate for any length of time without it having catastrophic second- and third-order effects. That’s the problem, not the concept of taxpayer-funded pensions. All sorts of things are going to be underfunded or otherwise hosed if you’re struggling with 25% unemployment for any length of time. Nations have imploded over far less.
They do in countries with extensive social systems. Look at Germany. There is boom for daycare services, retirement homes, various mobility devices, the country is sucking in females aged 40-60 from Poland employed (gray/black market mostly, I'm wondering who will take care of them in 20-30 years) to take care of Germany elderly, etc.
Is it the case though? The Netherlands _full_ state pension is 70% of the minimum wage, which ammount to something like 15K euros annualy. The Netherlands have a strong economy, but even there people have to rely on corporate pensions.
For comparison, the _average_ SS benefit in US is ~$15K, and max is ~$31K
In Germany there is a lot of talk about "Altersarmut" which means poverty when aged. It's not as bad as the US but a lot of people also have a very uncertain future.
Why would I want to be at a company for 30 years with a ridiculous vesting schedule in hopes of getting a pension?
On an unrelated note, the article mentioned in passing that some of these people are in debt paying for their children's college. Why does anyone feel like it's their responsibility to get in debt to put their children through college? Let their children go to a more affordable college, or let them take out debt on their own.
Every financial planner tells you to take care of your own retirement before you worry about your children's college.
I've made a lot of mistakes and made some intentionally choices that in my mid 40s, I don't see a comfortable retirement in my future even at 65. I'm not complaining about it, I like what I do, it's not physically demanding, and as a developer, my job is my hobby. I can't see myself not at least working part time in technology in some form.
Isn't this the result of diminishing return on the military spending in the US and the now absent pressure form Soviet Union to maintain the paritiy on social benefits?
This is the most jarring thing to me when I land in the US. Already at the airport you see security staff, cleaning staff that look like they should have been enjoying retirement for several years.
And the best part is that the next generation will have it even worse. They’ll have 75% Social security payments, little chance of building net worth through home purchases and a lifetime of $10/hr jobs.
Perversely, it may not be the worst thing if an entire generation decides that building wealth through your primary residence is not the best idea, and forgoes this in their lives and pushes their representatives to repeal the slew of incentives currently written into the tax code.
Not if in lieu of homes they invest in nothing at all. If you don't own a home you're paying rent. Rent prices have also increased dramatically so it's not like there's money going into savings.
Personally, I pay more in student loans than every one of my parents, aunts, and uncles pay on ybeir mortgage. I pay 2-3 times more in rent than their mortgage. I might be ok but only because of a high paying tech job. Those at the lower end the scale are absolutely fucked.
This is already happening. The new tax bill hits housing's special status three ways-- the mortgage deduction cap is lowered 25%, the standard deduction doubles (making the mortgage deduction less valuable) and high property taxes are no longer deductable.
Property ownership as your sole investment apparatus is obviously flawed, but seeing the ownership of all land and property centralized even further into the hands of land barons and oligarchs who can afford to rent seek an entire population is much worse.
There was a lot of misguided misdirection in trying to sell every US citizen on home ownership, but there was also a tinge of romanticism towards the principle that maybe everyone could have their own small slice of the pie rather than a few fat cats owning the whole thing with all of us begging to borrow a piece.
Here's a fun game for everyone. If you don't save, and your company doesn't save, and your government doesn't save then how the hell do you figure you're going to retire?
You can have a "contract of the generations", where the younger generation finances the pensions of the older generation through social security payments.
That's a ponzi scheme. That's what many countries in Europe do and that is currently collapsing.
It takes something like 4 active workers to pay the pension of 1 current retiree. The proportion was fine after the baby boom, it's not anymore and it's getting worse.
It's not a ponzi scheme, it's a numbers game. Basically the formula is: X * Y = A * B, where X is the number of retirees, Y the number of years they live past retirement on average, A the number of people who work, and B the number of years an average career lasts.
What is happening in europe is that the right-hand side of the equation is producing a lower number (due to later career starts and less actively working population), which requires reducing the left-hand side accordingly (by increasing retirement age or cutting pensions). The system cannot collapse (there's always a right-hand side), but it can require severe adjustments.
Don't you think that your formula needs a productivity term somewhere?
How is that when we talk about this, nobody mentions that if the gross domestic product per capita goes up enough, there is not problem.
The 'savings' perspective makes only sense in the personal sense.
I mean, the problem is not money. If in 20 years we have robots, infrastructure, cheap energy, etc enough for feeding and taking care of everybody there is not problem.
If we don't, never mind the 'savings' that you have, because the real limit are real resources.
This whole thread is weird. People think that paying retirements through social security means that future generations have to shoulder the burden. But if they instead "save" the money, somehow they won't have to?
In the end, the bread that goes on the table in 50 years will be produced by a farmer of the future generation.
Savings and social security are just two different ways of writing the same contract.
The base is a ponzi scheme. Promise to pay people over 65 a guaranteed sum per month and hope that the taxes on working people can fund it.
You're right that it doesn't have to be a ponzi scheme. The government could increase the age of retirement and/or lower the pensions. However that's not possible in practice, it doesn't get you elected and it'd provoke massive strikes for months.
The government would rather accumulate debt for 20 years than cut any pension. Then the next generation has to deal with unfunded pensions and trillions of debt. It's actually possible to go beyond recoverable and collapse because of the non elasticity, this has happened before historically.
>"Then the next generation has to deal with unfunded pensions and trillions of debt"
That doesn't make any sense. The next generation could have enough real resources or not. If they have they will be OK, if they don't they will have a problem. Real resources in the future come from investment now, not from "saving money".
Saving money makes sense in a personal perspective, but not as a nation.
You can't save money personally. The nation takes 20% of your gross salary to pay retirees. You don't have a choice.
In exchange, the nation promises to give you 80% of your last average salaries as a monthly income after you retire (in half a century) until the end of your life.
These numbers are not linked to real resources and are not adjusted periodically.
The "guaranteed sum" is not really guaranteed because the sum is denominated in a currency that is not pegged to any real resource. If the next generation can't produce enough real resources, then the pension amount will just be decreased via inflation.
The max FICA (Social Security) tax in 2017 was $7,886.40, which equates to an income of $127,200 (it's a 6.2% tax). There are many people making below that threshold, and not even paying that much.
You can't live very comfortably on less than $8,000 / year. It takes nearly two workers (maybe three if you consider the average annual income, and that the fair majority workers aren't making maximum FICA payments) to cover every retiree -- which seems to logically require successively larger working age adults than prior generations.
Seems to somewhat fit the defition, if you squint a little
> A Ponzi scheme is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit of financial trading.
Currently the only criticism you've made of the comparison is the name and amount of social acceptance.
> A Ponzi scheme is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors
It's not a 100% perfect match, but there are certainly enough similarities between how Social Security systems work and the basics of a Ponzi scheme that you'll have to make an actual criticism of the comparison if you want to argue how they're not the same.
A declining/aging population is problematic but a stable one isn’t. And you need some buffers in the system to manage the variations in birth rates. I thought this type of system was the most common these days?
Most nations have been set up with growth assumptions. I think you're right that in theory a nation with stable numbers for both can sustain itself. However, we'd have to redo much of the infrastructure assumptions in place today [1], and currently I don't see any nations that are ready to take that plunge.
[1] The only systems I see are either underfunded due to growth assumptions they haven't been able to hit, or are funded through natural resources that the country just happened to have. If there are exceptions I would genuinely like to know.
Fwiw the last 10 years have an average yoy growth rate of 1.48%, which is a difference in magnitude great enough from 2% to point out.
We have population growth fueled by immigration. If not for this the US would have population decline. This is what makes us very much an outlier amongst developed nations [1]. Despite this our pension funding situation does not look good.
[1] Germany probably has strong net inflows of educated workforce from EU nations as well.
France, Germany, Canada, US, Australia... many or all of the most advanced western nations have positive avg gdp around 1.5 to 2% and positive population growth as well. These are not the primary factors behind failing pension systems. In nearly all cases it ends up that those in charge dont make the required payments. In my home state that is the issue: had the mandated payments been made there would be no crisis. The state broke its own contract and dissobeyed a court order to fund unrelated discretionary spending. The major private pension failures have been similarly aflicted, executive flee a bankrupt company with agregate golden parachutes measured in hundreds of millions but the pension fund was ignored with underpayments for decades.
Our retirement systems are broken, and part of it stems from their own excessive costs, but there is no sinhle cause here, its a complex issue with complex causes, and shifting demographics and economic growth are only very minor factors. Bad policy, cynical politics and budget shenanigans, self interested executives, and simple incompetence and hobest mistakes all play the bigger part.
To double down on what user5994461 said, that's indeed a ponzi scheme and quite stupid if you know current population trends.
It also creates quite perverse incentives, as older folks want to reduce their retirement age (even as they live way longer) and raise the contributions of younger people (to pay for the extra costs).
It seems like in this monetary environment solutions are thus:
Individuals can get lines of credit issued against their homes or reverse mortgages. Also there's a plethora of subprime debt individuals can acquire and default on ranging from autos to ones education.
Companies can keep issuing bonds so that on some end of the food chain, central banks can keep purchasing them.
Governments can keep issuing bonds, even at negative interest rates, central banks can keep purchasing them.
If it isn't clear, this can go on forever and will always end well.
You don't save "resources" you save wealth which can be a fractional share of someone else's growing economy. Not that a growing economy is required for ROI.
Today, Social Security provides only enough for a bare-bones budget, about $14,000 a year on average.
Republicans: This is too much money, we can't afford it, it's take from the rich, give to the poor, these social programs need to end. Grandma deserves to die under a bridge by herself, it's her own fault she didn't work harder or save more.
Me: A bullet to the head of the aging is more ethical than the Republican prescription. Yes, absolutely take the money from the wealthy and keep grandma off the street. Jesus...
Oh we do. It's just saying you're going to do something vs actually doing it is much different.
It surprises me that Trump supporters can't see beyond words. Hopefully after these four years you will understand that jobs are going to be going away. There is essentially no way to move time backwards to when technology was at its infancy and there were hundreds of jobs.
Instead of supporting candidates who give people a false hope of steel jobs think about different systems to support everyone in the upcoming job armageddon.
I am not a Trump supporter, I am not even American, I am just a neutral observer so I can see things without the tribe mentality.
> It surprises me that Trump supporters can't see beyond words.
What was the alternative, Clinton was not sure what her platform was and I agree with you, some of her words were
very clear, calling the Trump voter a deplorable. That is not how you win elections.
If you are a 50 year old guy who worked hard all his life and then lost his job because the factory went to China are you going to vote for a guy who says he will bring back jobs or are you going to vote for a lady who could not figure out what exactly was her message (yet was in the news for her controversies) and calling you a deplorable. The choice is simple you will vote for the guy who says he will bring back jobs.
Saying Trump is all words is not the argument you can make when the general public have been hearing empty words from establishment politics for many years and yet making deals to ship their jobs overseas.
> think about different systems to support everyone in the upcoming job armageddon.
Would have been nice if the opposite side articulated what exactly that they were thinking of doing or at-least some vague idea would have been nice. Repeatedly saying "most qualified in the history to run as president" is not very convincing.
I recently worked in two restaurants. Everyone was part time because no one wanted to employ full time. No one had insurance.
On of my coworkers ended up in the hospital. She was taken on then dropped by 4 insurance companies, this was directly after she lost her military coverage.
She's 15k in debt working a job that pays $200/week.
I can toss a lot more stories back at you if you want.
Are you implying that she would have had insurance before the ACA? Before the ACA, you could get "cheap" insurance, but it was often a scam. I know because I discovered that the hard way. Pre-existing conditions are a thing.
How do does one get involuntarily booted from coverage provided by the ACA? Or did she voluntarily drop coverage? If the latter, that’s 100% on her, but if the former then that seems like it should be impossible and I’m very curious how it happened, that doesn’t make sense but then again neither does health insurance sometimes. :(
Could be that the plans or companies offering coverage in her region have changed from year to year? While I wouldn't call this being "dropped" others might.
Another possibility could be due to fraudulence during the application process?
The fundamental problem with pensions, however you arrange them, is that no one has a crystal ball.
If you were FDR, how could you possibly know that average person will live 10 years longer, or that we're going to end up with birth control and a consequent demographic cliff?
I'm saying that life expectancy at birth is a misleading statistic when it comes to gauging the ratio of inputs to outputs on pension programs of any sort.
Defined benefit plans, i.e. pensions, are a total disaster. They are premised on a fantasy: that the pension fund will make enough money on the market to to pay its liabilities, or that the backing entity will bail it out if not. Those are bad assumptions. The result is pension funds going broke across the country, and it's just getting started.
Defined contribution plans, 401k's and such, are much more sensible. You set aside a percentage of your income, your employer throws some in for you as well, and you decide how to invest it. You decide what level of risk you want to take with your future wealth, and you reap the gains and losses.
I'm not sure 401ks are so great. Many charge ridiculous management fees for funds that track mundane things like the S&P 500, but if you want that employer match, no way around it.
Mostly a case of perfectly intelligent people throwing wads of money into the market on autopilot because that's all the 401k lets you do. Lambs to the slaughter!
edit: Example: Back when I was on 401k, was into a S&P500 fund that had an expense ratio over 1.5%. It may not sound like much, but that's compounded year-after-year. All of the other funds the 401k allowed had equally scandalous expense ratios.
After starting a business, I rolled over into an IRA. Switched to a different S&P500 fund with expense ratio of 0.09%. Same curve, but I keep more of my money.
It would be nice if people had more latitude in what they could put their retirement into--especially when it comes to tangible things, like buildings or equipment--that you can get some value out of even if the market happens to be down when you retire.
> Mostly a case of perfectly intelligent people throwing wads of money into the market on autopilot because that's all the 401k lets you do. Lambs to the slaughter!
That's called "buy and hold" investing (putting additional dollars you have into the market, as your paychecks come in).
Historically, it's been a great way to grow wealth. You invest in index funds, and you get basically the market return less some fees.
> expense ratio over 1.5%
This is worse-case scenario. Employers are coming around to see these fees as astronomical. Plus, well-funded 401(k)'s can get institutional rates, due to their portfolio size. We're talking expense ratio's of 0.03, 0.02, almost non-existent.
Running everything through the stock market doesn't seem like particularly good risk management to me. Even with a diversified portfolio, in a panic everything goes down.
With something tangible, like a building, or a piece of equipment, you can still get some kind of revenue stream from the use of it while you wait for the market to recover.
If Wal-Mart guy could have put some of his retirement into lawn equipment or a hot-dog cart, I'm almost certain he could make more in an afternoon with that than what Wal-Mart is paying him for a week's work.
When was this / which vendor was this? My barebones Fidelity 401k plan which only gave me 12 funds to choose from had a S&P500 fund with an expense ratio of ~0.2% iirc. (I don't remember what sort of fees there were in the overall 401k account though)
edit: Most of his had different titles, but their largest holdings were the same handful of stocks. We overlaid the S&P 500 on top of most of them--practically identical performance from time of inception!
Edward Jones is exceptionally bad. I remember a few years ago, articles about them directing investments preferentially into funds they were rewarded on. I see as many of their branches as convenience stores and wonder why so many people would give them their savings?
those pdfs give basically no inforamation at all. I certainly hope that the equity funds are actively managed (rather than passively managed, though tbh actively managed funds that are provided in a 401k plan are going to be crap about 95%+ of the time) if they are charging 1%+ in fees.
It sounds like you had a crappy 401k. The one we had when my work offered one had a large number of funds available, with expense ratios close to Vanguard's. Ours was through Fidelity.
Employers should absolutely stop offering high-fee funds. Large employers should be offering institutional funds.
My employer uses Vanguard and gives us access to Vanguard's institutional S&P500 fund at 3.5 basis points. Our plan rules also allow for in-service contributions from existing IRA assets so I've been moving all my IRAs into my 401k for access to these cheap funds.
Why are you saying this? The employee can make up to $18,000 in contributions to a 401k, and still max out their IRA (Roth or conventional). You're not maxing out your retirement savings options if you're refusing to participate in a 401k.
For those who are self employed should look into SEP and SIMPLE IRAs, in addition to making the max contribution to a Roth IRA and HSA.
For those over 50, many offer additional catch up contribution limits, which raise the max contribution you can make each year.
I think you are wrong, because of saving on taxes, and company match, and the fact that many people won't save otherwise, 401ks often make sense. Just chose sensible investments that don't have high fees. I know that's actually nontrivial, but otherwise many people don't have savings.
It would be nice if people could keep the match and have more control over their portfolios. Buy & sell stocks, bonds, commodities, etc. whenever instead of a very small basket of mutual funds that can only be juggled a few times a year.
My wife's doesn't have a match per se. Instead the company contributes a lump sum annually that amounts to about 5% of her income. She wouldn't have to contribute anything to get this money and it doesn't count against her annual cap. It is accounted for separately from her contributions, so might technically not be a part of her 401k.
We had that when I was working in a top investment bank, in the UK office.
The employment contract was accompanied by a 50 page document explaining the pension system, a long tutorial on risks/asset-types/location/diversification and everything you ever wish to know about pension, and last but not least the 20 funds they make available to us.
We don't do a match but offer a safe harbor automatic 3% contribution which everyone gets. This is nice because some younger employees don't contribute anything but we're still helping out their 401k.
yes the limitation of 401k plan fund choices seems very arbitrary to me. Perhaps a result of lobbying, or a remnant of the past when such limitations were a good call?
I'm using it to save taxes, because I'm not sure what are the alternatives. You're comment makes me feel I should be less ignorant: any good online reading to suggest?
There isn’t a good tax-advantaged alternative if you’re an employee with access to a 401k. If you’re under the income limit, you can make deductible contributions to an traditional IRA but that’s capped at $5500 per year vs $18,000 for the 401k. Plus there’s no company match there. The best practice is to contribute to your 401k up to the employer match and then contribute the rest to an IRA. Once you’re at the IRA limit you comtribute the rest to the 401k.
It's worth doing the "what if" on a Roth 401(k). The money goes in after tax, so you lose the deduction, but the money grows tax free, and you can pull it out tax free. Usually you come out ahead paying tax on less money now, and no tax on the grown investment later.
You can also open an IRA on your own and stuff that to the limit every year. Again there is a Roth version, which you can dip into for certain things before retirement age without penalty, and never pay tax on the withdrawal because tax was paid already going in.
Another thing to look into is if your employer can offer an HSA qualifying health care plan. You get a tax deduction on the front end when funding the HSA, and it can grow tax free, with tax free withdrawals for qualifying medical expenses - the trick is to never use it while you're working. Just pay co-pays, and deductible amount from pocket, instead of from the HSA. Use the HSA later to pay the things Medicare doesn't (which is a lot).
The best way to avoid taxes is to make the maximum possible contribution every year now while you can.
I can't contribute to my old Roth but I have a trad IRA I can legally contribute to.
One interesting point to make is to some extent its all a waste of time; the annual contribution limit for Roth or Trad IRAs is less than the monthly cost of my Uncles nursing home; all you're going to do by investing in IRAs is make some middleman slightly richer before you go on full government assistance; the IRA is not going to last long and your body is going to last longer. The purpose of "the system" is to get all your money before you die, so struggling to accumulate more merely means you'll get some rich guy a bonus for taking lots of your money as opposed to little of someone elses money.
There are no weird income or investment limitations on plain old investment accounts, which is why my plain old brokerage account is something like 10x larger than my two IRAs. Likewise my MiL is using her suburban house as her retirement account, more or less. Also the fedgov thinks people retire at 65, every single person, which is comical; due to ageism in my field I need a way to get an income for decades before I am 65 so IRAs that limit access for decades are kinda stupid to invest in unless you're in a "pocketwatch and lifetime sinecure position" job where you can reasonably expect to retire from that single lifetime employer at 65...
> One interesting point to make is to some extent its all a waste of time…
> due to ageism in my field I need a way to get an income for decades before I am 65…
Yeah, my thinking is the same, so for the past year I've been working on a framework I could use to swing trade futures via an online brokerage.
So far in my backtests from the end of 2004 to mid 2017 (about 12.7 years) I'm getting and avg return of %5.5, avg volatility of %6.8, and worst draw down of %9.7 percent.
Still trying to improve things, but I hope to hook it up an brokerage api, and monitor it on autopilot in the next year or so, but compared to the stats of the S&P 500 and the risk to get those returns during the same timeframe, I'm thinking about doing this sooner rather than later with where I'm at now.
As an individual, I don't think I can just compete with the insider dealing and foreign CB buy-and-hold of the s&p 500 with a passive strategy… so for me, I think the odds are evened out in the futures market.
Is retirement planning (Live "below your means" and put in 20-30% or more of your salary towards long term investments), and family support (you fund your kids education and parents post retirement needs, and your kids fund your post retirement needs and your grandkids education) such an alien concept for Americans? When you manage it internally, instead of paying interest to a bank, you just have lost opportunity costs of investment within the family.
AFAIK, most Asian countries do work this way. Given American salaries, this should be very easy to manage in US
There is lots of Americans who barely get by. I recommend taking a look at "Nickeled and Dimed" by Barbara Ehrenreich. So many people simply cannot afford to put that much money aside. To the point of family support: Many Americans move across state lines a few times during their lifetime. That very much weakens family bonds. On top of that it's much harder to take care of your parents alone while your siblings live in different states. It in fact also makes having children harder.
++1 for "Nickel and Dimed: On (Not) Getting By in America". A fascinating read, it's the narrative of writer Barbara Ehrenreich as she goes undercover and participates in the minimum-wage economy in the US. It recounts not just her time on the clock, but equally the trials and trade-offs of simply surviving on such incomes.
Welcome to the internet! Good guess - that style of extended family reliance is quite alien to many Americans, often discussed under the topic "collectivism v individualism" or a similar name. That aside, there are many other differences in financial expectations and abilities in the two cultures, so a simple comparison of salary amounts isn't a good way to tell if Americans "should be able" to do something that happens in other countries.
Is that why China has seen protests numbering in the hundreds of thousands of workers put out by more efficient management methods? They can afford to protest? Or are they in crisis, realizing the cost of living is skyrocketing and they all of a sudden have no money to honor either end of that bargain?
There's a growing recognition today of a social crisis in Korea where the working generation today is less willing to support the parents who sank every dollar into pushing their children into lucrative professional careers. It sounds terrible, but from the children's perspective, they experienced less choice about their future because they're just an investment vehicle for their parents. The exact compact you describe breeds generational resentment.
Interesting. This sort of resentment is not showing up in India (yet). Perhaps a generation or 2 later it might since the N-2 today still has govt funded pensions and the N-1 generation again either has pensions or stocked up on wealth through the economic boom after the Indian economy opened up in the late 90's
It’s easy to consider putting 20 to 30% of your salary towards savings and investments when you are making Silicon Valley money. It’s not so easy when you are making minimum wage while paying school loans, or even if you are one of the families earning the median household income of ~$60k and you have a couple kids.
Hm? I dump about 25% of my compensation while living in the Valley (right in Sunnyvale), even while paying 100% of the rent/costs for my 2 bedroom apartment and take multiple vacations a year. I actually even debated dumping almost 6% more, but I want to save up for a trip to Japan in a couple of months.
Would you be willing to disclose your earnings so we can decide if your anecdote can be considered common for
Silicon Valley or not? Also do you happen to have any dependents?
I'd do this if I wasn't supporting kid/wife. Most problem I hear when trying to hire people from outside the valley is when they have a family: the salary in tech allows a confortable appartement, but not easily a house in a good school district.
Good in theory but difficult in practice. I only know what I know because I read about it, was lucky to be exposed to retirement planning, everyone else? Not so lucky.
> federal judge agreed that McDonnell-Douglas had illegally considered the pensions in its decision to close the plant. The employees case, presented by attorneys Joe Farris and Mike Mulder, showed that the company had tracked pension savings in its plant closure decisions
WTF! So a company is not allowed to consider costs in a cost cutting decision? Was this not a conscious risk an employee took by accepting a job on the chance of pension received if they were not fired before retirement? How is it different from buying a ton of stocks of failing companies and then suing if the price crashes further?
> It's more like the risk assumed by taking a job and expecting a salary
Not really. The case doesn’t seem to involve the company trying to default on existing obligations. It involves them projecting future costs and deciding whether to carry them. This is akin to laying off an employee, something most states freely permit, more than defaulting on pay for work already done.
I just see it as making promises (pensions) the company was not committed to keep. I'm sure the judge didn't use the word "mendacity " lightly or unadvisedly.
The case [1] is an interesting skim. Section 510 of ERISA says “[i]t shall be unlawful for any person to discharge ... or discriminate against a participant or beneficiary for ... the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan (or ERISA)” (¶ 219).
Closing a plant to save money isn’t per se illegal (¶ 222). The employer just had to show they had a legitimate reason for closing the plant (¶ 223).
Instead, they kept talking about how the pension plan had nothing to do with the plant’s closure (¶ 226). That was not credible (¶ 263). (The plant’s employees had helped lobby for a new F-15 contract (¶ 15). There may have been political reasons the company couldn’t say “pension costs factored into our decision, though other reasons were prominent, too”.)
Since the “Defendant was in the best position to put forth the actual reasons for its decision, if in fact such reasons were legitimate” and it “repeatedly failed to do so, engaging in a pattern of discovery abuse and refusal to respond to proper inquiries by both Plaintiffs and the Court“ (¶ 257) the plaintiffs won (§ 4).
It is unclear how cleanly this unusual case generalises to the claim made in the original article.
Recently, I made this visualization of how US social security benefits are calculated:
https://lewis500.github.io/socialsecurity
Before I made it I actually had no idea. I think I might have worked a little harder to earn money when I was younger if I'd understood.