Monday, July 23, 2012

The Inadequacy of 401k's

A good article on the looming catastrophe here via Mark Perry of all people. As Mark points out, nearly 3/4 of near retirees (aged 50 to 64) have an average retirement account balance of $26K.

Right wingers of course want to kill off Social Security. They can talk about personal responsibility all day long, but they have to answer this question. What are you going to do about the MANY people that for whatever reason just will not save enough on their own? You can react like the tea party types at the Republican debate. "Let 'em die." But massive inequality and suffering has a tendency to become everyone's problem. Even the rich.


Examinator said...

Yep this is wise advice for those where these options exist or ARE realistically possible. It is an absolute nonsense to suggest that they always are, for the majority of the population, under the current ethos that exists in the westernised world.
I'm not speaking philosophically either, just hard facts.
First I need to point out some realities of Capitalism needs um...low end paid workers to survive. In fact Capitalism is predicated on exploitation of these demographics.
One key element is that it requires this majority to not be too smart/educated etc .
There is a clear reverse link between education and a willingness to perform low paying, low status jobs.
i.e. Bush, Romney are big on the say national defence but neither has done the hard yards... likewise neither has ever done for money/survival the menial work that most Citizens do every day. They started with an advantage 99% of the population did/do. One wonder if without these advantages Bush wouldn't have been Joe truckie. IQ, history etc would suggest that was more likely than not. By any reasoning what we have in the Westernised world is just a more sophisticated version of 'born to rule' hierarchal system that limits the functional ability to rise to the top, and if one does it is beholden on them to join, propagate the elitism.
Proven research has shown most people spend more effort protecting their gains and status (excluding others) that they do in improving it. Any one who has been in a position of power knows op the Machiavellian political manoeuvring necessary to keep ones position or simply to get something done.
Chomsky points out capitalism actually doesn't want a well informed/educated population because they would by being educated and informed they may challenge the competence of say a Bush or say the 'right to exist' of some financial institutions, executives and their assorted dodges. They would reject(heaven forbid) the flim flam of advertising and politics. Products might actually have to declare their conflicts of interest and double handling not to mention their unjustified gouging.

Simple math shows that.

a. The top 25% still only consume a fixed ratio of consumables ...i.e. food, TV etc ...capitalism needs the mass public to consume.
b. it is a FACT that the remaining 75% spend more of their income on survival issues and as such have far less disposable income to put away on 401k's etc. They are in the situation where 30% of their income would make the difference as to food, health care, schooling , clothes et al.
Suggestions that a minimum wage or near so earner, could put that much away is utter nonsense. Particularly the unspoken “Under employed” (those locked into the 'casualisation' of employment).

What I find so frustrating is that there are better systems available. That don't mean revolution.

HispanicPundit said...

You are not giving the right-wing a fair hearing here. To be fair:

1. Right-wingers want to cut off social-security for those say, middle aged and younger. Certainly not for those near the age of retirement.

2. Economists generally agree that a reason for the publics lackluster savings is precisely because they know social-security will be available. It makes sense: why save, when social-security is already doing it for you?

Remove social-security and savings will go up. How much? That is an empirical question, but it certainly can't be answered based on todays savings rates.

3. It will still be hard to save given tight resources, you say? Well remember, if Social-Security is abolished than so would payroll taxes. Which would have two affects:

1. Employment would go up. So now you would have MORE people with jobs, who are able to save.

2. Most importantly, you would have current wages go up. Giving employees more money of which to save for retirement.

And as even your calculations show, even a moderately sized increase in savings can dwarf social-security returns.

HispanicPundit said...

Btw, I am not saying I agree with the proposition that social-security should be abolished. Frankly, I am still undecided on that point.

But I think if one understands the full economics of it, the question is alot more interesting - and less one sided - than the populists like to present it.

Jon said...

Right-wingers want to cut off social-security for those say, middle aged and younger. Certainly not for those near the age of retirement.

Yes, I understand. Ron Paul for instance wants to phase it out. Pay out for those that are completely dependent on it and reduce benefits more and more over subsequent years. But the end goal is what I stated. He wants to kill the program off.

Economists generally agree that a reason for the publics lackluster savings is precisely because they know social-security will be available.

Yes, once again I agree. Savings would improve if we had no SS whatsoever. But what I want you to face is this question. Obviously some people just will not save sufficiently if SS is removed. What do you want to do about them? Nothing? And I don't mean you personally since I see you're not necessarily in favor of abolishing SS. But I'm just saying that proponents of eliminating the program, like Ron Paul, need to address that question.

It will still be hard to save given tight resources, you say?

Actually I don't say that and don't really believe it. I don't think it's that hard to save for most people. Or I should say it is, but it isn't. My view is maybe a bit nuanced. But the point is I just recognize the fact that for whatever reason people just don't save sufficiently. So now what? I say let's keep SS strong. That's a good answer.

And yes it can't compare to a savings program since it isn't a savings program. Really it's an insurance plan. Just like your health insurance premiums aren't put into a savings plan to fund your future illnesses. Instead they are used to fund health care for others now. That's OK with me. That's the nature of insurance.

Chad said...

I honestly could care less how many gov't programs are created and why, I only want the opportunity to opt completely out of every single one.

If they are sound programs they can and will survive without my and others participation. In fact if they are sound and they work they should attract participation.

I'd rather get a monthly bill from the fire dept, from the police depart and from the teachers rather than giving money to gov't. It's good to see what things cost because these crazy pension plans would never have gotten this far out of control - the paying people would have spoken up way before now.

Chad said...

When I say opt out, I mean completely. My tax money can not be used for the admin, salary, pension of the program either.

Examinator said...

Hispanic pundit
I think you are being a bit too generalised with
[“2. Economists generally agree that a reason for the publics lack luster savings is precisely because they know social-security will be available.”]
That should read "SOME RIGHT WING economists"
I could give you an impressive list of economists who would disagree strongly or at least caveat it so strongly that it changed the meaning/context substantially.
Functionally that isn't possible for many if not most Social security recipients.
It is a demonstrable myth that welfare leeches are the majority or anything near that. Most of the social welfare payments by a long throw is to the aged and the disabled.
If you want to reduce the figure substantially stop the wars that create the most expensive payouts.
N.B. I'm NOT saying stop support for vets.
Also you need to factor in the actual number of SS recipients as a % of the population. and then look at :-
a. the reasons they are on 'benefits'.
b. their ability to find jobs that will allow them to put aside the 30% or save as mentioned in the article.
c. consider the Type and pay levels of the jobs available if any.
d. It is a fact that the "middle class" once considered 'average' (sic) (i.e. those ABLE to save) is shrinking.
e. given that 40%- 50% of the nation's wealth is held by the top 5% and is subject to off shore tax dodges
F. I fail to see the math that would Support the bottom 30%'s meagre savings, being able, to make much difference.
If we take China the biggest saver for example one has no appreciable SS but it does have a rich and middle class that in therms of raw numbers is more than the whole population of the USA.
NB it also has a poverty population nearly 2X that of the USA. Amongst which is a substantial number of subsistence/small time market gardeners ... USA has a minuscule number of them.
My point is that unless you want subsistence level poverty = those countries that have no SS then the proposition to abolish SS is untenable.
This brings up back to the underlying weaknesses in 401k' s or rather the lack of them. Simply put most people don't have the skills/ opportunity to earn sufficient money unless one is prepared to pay the price of becoming a structure akin to current China/India et al.

Examinator said...

Hispanic Pundit,
The next myth that needs to be deflated is that payroll tax stops employment ...having worked in a corporation where PT was reduced it simply spread the wind fall into many areas.
1. hastened the purchase from O/S a now machine that ultimately replaced (17) then current full time employees.
2. ensured a 5cent increase in the share dividend
3.which ensured a multi million $ bonuses for the top execs. (NOT INCLUDING ME).
4.They employed 4 new F/T. employees to run the Machine .
for which they claimed an extra bonus for new employees.(cheaper and more immediate profits than retraining)
There is generally no empirical data which proves that without PT would result in a net Full time employment or wage increases.
The theory fails because of the priorities within corporations which AREN'T interest in more employment or the country towns etc. Only the best profits for them.
You should also note that payroll tax had/ has little effect on closing large plants in say a single /major employer towns (say the freight forwarder hub closure in the mid west) V going off shore or consolidating in existing sites elsewhere.
Consider what happens in a small town like that...the dislocation , the availability for replacement jobs.
Wife has a job but hubby doesn't they sell their house in a down market and go to a big city where neither may get a job? have the skills.. what about the children?
It simply isn't that simplistic.

HispanicPundit said...

But what I want you to face is this question. Obviously some people just will not save sufficiently if SS is removed. What do you want to do about them? Nothing?

From the governments perspective, yes, nothing. They serve as lessons to others, essentially: save or you reach old age with no government help.

It's basically what we do now with those that escape the social security system. Those who were unemployed, immigrants, etc.

I'm actually fine with this part of it. In general, I am all for more personal responsibility: where people bear the full brunt of the decisions they consciously made. It's the children, the handicapped, the general truly helpless I lose sleep over.

But telling an old person who decided to spend all his money that he now has to sleep on the streets, I can live with that.

But of course, even this scenario isn't likely to happen. I expect charity to pick up alot of the slack (though certainly not all).

Examinator said...

Hispanic pundit,
From your silence to my rebuttal do I assume you
a. didn't read what I said
b. that you now agree with me that it wouldn't work?
c. the change of topic means you are ignoring following through with the debate by offering Facts to support your assertions?
d. are going to use the usual Right wing tactic when losing i.e. distract with an irrelevant challenge

The subject under discussion is the inadequacies of 401k.not what to do with SS.

But since you raised it I'll answer your ill defined question ....
First define what you mean by your example of an old man sleeping in the street because he spent his money . The implication is what ? Anybody sleeping rough it's their fault and therefore should be punished by doing nothing?
Anybody without money should be punished? really?

Do you really think that a retiring person says to themselves 'I must blow all my money so I can live luxuriously on the pension.'?
Well let me wise you up a little on the facts 80% of private savings( not rich) comes from the 35-65 age group. Who are concerned about looking after their families etc. and their post work lives. That's why these people are the best targets for life insurance corporations. They don't chase marginal not interested people.
I'd like a $ for every old aged person who skimps on every thing to pay for a modest interment. Some (way too many) have gotten so concerned that they eat dog or cat food to save money.
I'm sorry but your under pinning philosophy ignores human nature.
Sure there are some SS sponges and there are a lot of people who are lacking the expertise how to effectively budget to save . There are even more who are under employed i.e. have only part time minimum wage to survive on, with all that implies.
Your philosophy needs a perfect world ...i.e. that there are sufficient jobs that all countries around the world pay the same basic wage (so there's no need to go off shore to make obscene profits.). That no company tries dubious methods to ; hide income(ergo taxes) ; to stifle innovation because of previously invested capital in obsolete technology; the list goes on ….(aka a level paying field) it doesn't exist!
Therefore we plan 'B' .
So long as pointless debate that are based on fanciful (non existent )situations and ignorance we're still locked into Plan A version 20000.7.98 i.e. blame someone else ..preferably the weakest/ most vulnerable and do nothing.

Jon said...

If they are sound programs they can and will survive without my and others participation.

You obviously don't understand how SS works. It's an insurance program. Just like car insurance. Today's premiums pay for today's accidents. Insurance companies don't take your money and put it in a savings account to pay for an accident you might have in the future.

The premiums you pay in SS today are used to pay elderly retirees today. So if you and I don't pay those retirees don't get their check, and they therefore go hungry today.

That's just as sensible as the whole car insurance industry and it's just as sound, but if suddenly everybody said "I'm not paying my insurance premiums" the system would collapse. Some would be better off. Those that aren't affected by auto accidents. The rest would get hit by somebody in a car and be destitute.

I don't think you can point to any government program that has done more to reduce elderly starvation and homelessness. The program has run a surplus. And it's in great shape for the future, capable of paying out full benefits for like another 25 years, then automatically switching to a slight reduction if changes aren't made so that it NEVER contributes to the deficit. The real reason it's hated by the right is because it's another example of a government program that's worked really well.

Jon said...


Yeah, "Let em die" is one conservative view, but if that's the method you want to adopt I just want you to recognize that this level of suffering has a way of coming back to bite you even if you happen to have enough in retirement. That much misery is socially unstable, and that means costs that you will pay. It might be cheaper for you to forego the savings you would have otherwise had in order to prevent social unrest. Additionally obviously you get a lot less suffering all around, which I assume is something you would prefer. What do you think?

Jon said...

Just to note that I assume you think suffering would be reduced by your methods because people will learn the hard lessons and save better, and also have more freedom to do what they want with their own earnings in the mean time. I say this just so you know I understand the theory, but I think empirically we have good reason to think this theory doesn't actually correspond to the real world.

HispanicPundit said...


I choose a. :-)


A couple responses.

First, diving a bit into your discussion with Chad, you wrote:

The premiums you pay in SS today are used to pay elderly retirees today. So if you and I don't pay those retirees don't get their check, and they therefore go hungry today.

This is not true. You know this. Quit with the exaggerations. Chad's proposal would be, essentially, a transitory cost. Sure, today it would cost us more. But when Chad retires, it will cost us LESS. And since the wealthy tend to live longer, it might even be a net boom to social security.

Will there be a temporary spike as many people drop out? Sure. But that can be added to the deficit. Or taken away from military spending, or.... No need to let the current elderly "go hungry today".

Back to our exchange, you write:

Yeah, "Let em die" is one conservative view,...

I prefer to call it: personal responsibility. Live with the decisions you made. I'm fine with that.

How many people would actually die though? I doubt many. Sure, it would be an increase - but I doubt it would be drastic. Most people respond to incentives. Charity will pick up alot of the slack. And the rest can simply serve as examples.

I doubt it would be anything on the scale to reach "socially unstable" levels.

But even if it did, you know my views on alleviating poverty: better to alleviate TRUE poverty than "relative poverty". In other words, better to send money to the destitute in India, or Africa, or China, than some relatively rich american who decided to spend all his money on gambling, or drugs, or consumerism, or any other vice.

That's real deserved suffering alleviation that is worth the money.

Jon said...

This is not true. You know this. Quit with the exaggerations. Chad's proposal would be, essentially, a transitory cost.

We'll have to let Chad tell us if that's what he meant. I thought he meant he wanted out entirely, like he wouldn't pay in anything any more. If it's so great it can get along fine without him and those that like it can stay in. That assumes the program is like a savings plan, which is a common misconception.

As far as social instability, yeah, it's speculative. Maybe you'd be fine.

As far as alleviating poverty in Africa, that has nothing to do with this discussion. It's not as if eliminating SS is some sort of benefit for Africa. In fact during the period for which taxes in the US have become less progressive, we've had less income redistribution, less regulation, etc things have gotten much worse in Africa, so there's no empirical reason to think that additional suffering for elderly Americans is somehow good for Africa.

HispanicPundit said...

In fact during the period for which taxes in the US have become less progressive, we've had less income redistribution, less regulation, etc things have gotten much worse in Africa, so there's no empirical reason to think that additional suffering for elderly Americans is somehow good for Africa.

You say this, but can you prove it? I, of course, have heard differently. I wanna see your proof for such strong statements.

Jon said...

My source is Ha Joon Chang in "Bad Samaritans." Sorry, I hate to just refer you vaguely to a book because I know it takes a lot of effort to check that. I'll see if I can dig something up online.

But the book is really great and worth your time to read, as I've mentioned before.

HispanicPundit said...

 Here is my evidence to the contrary. See herehere and here.

Jon said...

Without sidetracking the discussion into how things are going in Africa the fact remains that there is no reason to think inducing suffering amongst elderly Americans helps Africa so to say it's better to alleviate poverty in Africa than in the US is beside the point.

HispanicPundit said...

There are trade-offs. Money has limitations. You can't do everything. Priorities have to be made.

My point is that the money spent on "alleviating suffering" should target the most needy people. Not "relatively" needy people. Hence my near universal dislike of any government support for responsible adults.

Jon said...

Is it your argument that scaling back/eliminating SS helps Africans?

HispanicPundit said...

My argument is that "relative suffering" of the worlds richest people carries little weight in whether SS is a preferable policy.

But yes, in general, I would argue that a lower tax rate leads, partially, to more general charity, which leads, partially, to better results in Africa. Not a direct relationship, but there is one.

Chad said...

HP - Are you saying that people are generally generous and will do good if given the chance? AMEN.

I give to charity regularly, but when gas went up to $4 from $1.60 and other costs went up, my charitable contributions went down. A budget is a budget after all.

Jon and others like him would rather take our money to distribute as they see fit versus individuals making the choice to help.

AMEN sir, Amen.

Jon said...

Good Guy HP. Battling against SS because he cares so much for Africans.

On net people don't actually have less money due to SS. A tiny amount due to the tiny administrative cost (some of which of course is income for the government administrative employees). SS is an income transfer. Over 99% of the money taken from me goes straight into the pockets of the elderly. The more money they have the more they give to charity.

And check this out. Nobody gives a higher % of their income to charity than the poor.

SS is mildly redistrubutionist, so insofar as it redistributes it leads to MORE charitable giving. Also it grows our economy because it spurs demand since the poor spend more of their income than the rich. This leads to more income for others and hence even more charitable giving..

All that and it doesn't contribute to the deficit (in fact it has run a surplus). Nothing has done more to reduce elderly starvation and homelessness in this country. Pretty impressive.

Chad said...

Percentage of wealth statistic? So my contribution last year of over $5k sucks because by percentage I give less than the $100 someone else gave? Whatever angle makes you feel better JC - I will take the 5 grand over a hundred bucks.

Also giving away a portion of money given to you or giving away money because you pay no income tax should not count.

Nice try though.

Chad said...

Also there is a maximum allowed deduction on charitable contributions (Jon knows this) so how can you be sure those stats are right, because I know they are not. We gave away a couple thousand dollars worth of clothes and other goods we could not claim because we maxed our deductions. Garbage in - garbage out.

BTW - eliminate the max deductible situation and maybe the percentage might get better.

Jon said...

Take 4 families that combined make the same as you. While you'd give $5K they'd combine to give more. So if we do an income transfer, take some of your money and give it to them, all told more money will go to charity. Seems you don't want to accept facts because they don't make you feel good, but facts are facts.

Looks like you can deducty property donations up to 30% of your adgusted gross income, but if you exceed $5K you need a written appraisal. Cash donations up to 50% of your AGI. So you can actually give a lot more than $5K.

Chad said...

Take the same 4 families that don't pay income taxes so my donation is far more than theirs.

Chad said...

Didn't know you had an accounting degree as well. Our tax advisor outlined to us that at $5k we met the maximum deductions we could take.

I need proof of the 50% because all I hear - from my job creating friends - is that they max deductions far below what your outlining. I call BS.

Chad said...

Also how do you count hours donated? Can't wait to tell the kitchen that I will no longer help because according to Jon I don't give enough. Maybe I should work those hours instead and make some more cash for me and my own.

HispanicPundit said...

Those who believe in abolishing social security can make the same arguments Jon:

1. Savings will go up without social security.

2. The savings rate is far higher in the private sector than the "return" social security gives you.

Ergo, more disposable income.

Will some people now be left with nothing because of bad choices? Sure. But I doubt they were the ones who were giving much to charity anyway.

Jon said...

They don't pay what you do in income taxes, but why is it that only income taxes matter? What about other taxes?

I assume your tax adviser told you that because you didn't bring an appraisal of the value of your charitable donations, which is what I told you. Here's the IRS explaining procedures for deducting donations in excess of $5K. Here's H&R Block with more procedures related to the 50% and 30% limits I mentioned. You get so many easily Googlable things wrong. And yet you're so confident in your opinions, like your opinion that global warming isn't a problem. At what point do these errors lead you to re-assess your confidence levels?

Your job creating friends, eh? You mean poor people. Since the rich are really the job killers.

Your volunteer work is not tax deductible. If you are only doing it for the money you are in for disappointment.

Jon said...

HP, I don't think they can make the same argument as me. What they can do is tell a story. If you eliminate SS savings will go up. Now that these people formerly not saving are saving more money will go to charity. That's the story. Why think it's true?

The only reason they are now saving is because they know that SS will not be there for them. Basically fear for their future. Knowing how much it will be necessary for them to save why wouldn't they rather now give less to charity? They must put more away. Giving to charity puts their future more at risk than it did when SS was around.

Also you have the fact that SS is redistributionary. What does that do to the economy when you initiate policies that exacerbate inequality even further. You get all the various consequences described in this Ted Talk. You get the further collapse in demand since the poor spend a higher % of their income than the rich. And lack of demand is the major driver of our economic downturn today. That exacerbates poverty, leading to further deductions in charity amongst the income group that gives the most. This is all around bad for Africans.

HispanicPundit said...

Your response needs to factor in two points:

1. The savings that would happen outside of SS would be greater and larger. This makes people feel wealthier. Feeling wealthier leads to more charity.

2. The payroll tax - basically the tax used to fund SS - is in fact regressive, not progressive.

Jon said...

OK, but you need to factor the following points:

1-Eliminating SS exacerbates inequality. See the TED talk for the effects and costs associated with them.

2-If you eliminate SS money today is shifted away from spending and into savings, reducing aggregate demand. How does this impact the overall economy? What does that mean for charity?

3-The poor give a larger share of their income to charity than the rich. Eliminating SS sends more money to the rich and less to the poor, meaning a lower share of income will now be going to charity. What does this do to Africa?

4-What is the net effect of the savings in terms of making people feel wealthier? I feel wealthier. But the elderly person that used to get my money doesn't. If I'm in a high income group and he's in a low income group, what does that mean for charity?

I think at best we can say that we can't conclude that eliminating SS helps Africans. So any objections to SS should have nothing to do with Africa. You can ignore the issue if you like and say we should focus on other more important things, but you can't say we should eliminate SS because we care about the plight of Africans.

Chad said...

JC - My confidence in what exactly, not knowing the entire tax code inside and out - there is a lot I don't know, but it doesn't shake my confidence no.

All that happened is now we know to get an apprasial which is no problem and we will pay even less in taxes this year!!!!!!!

Examinator said...

The problem I have with your assessments is that they are far too simplistic.
e.g. most charities are staffed and or operated (executives excluded) are either staffed by volunteers or have very high numbers of them. One large charity I know of actually has a paid to volunteer ratio of about 1/30. If those volunteers were paid simply wages commensurate to the task then the organisation could not exist. Also don't forget that many who donate time as well as cash also do highly paid functions (for free) in those charities.

BTW these volunteers (mostly retired/unemployed/ under employed many/most SS recipients, don't get the tax advantage/break on their tax because of the donation as say Me. In reality My Tax break is subsidised by other tax payers. So in fact the donation minus the break the actually cost to me would have been something less.

Using business math/logic, A donation of clothes has in reality little or no worth to to the donor ..I reason the same as for me Clothes I give to charity won't be worn by me any more . Usable value $0 . Unless I am going to run garage sale at which case the value received would not cover the labor to sell them. The only other option is to sell them to a second hand clothing shop...they'll pick the eyes and pay noting for for that... uneconomic...ergo opportunity/ recovery cost Nil. So the reality I was sacrificing nothing! Where's the generosity in nothing ? Would I be so churlish as to trash them because I have no use for them....Seems to me too many people do that with everything from other people's property to other's lives.

To pursue this a little further more often than not charity shops are more frequented by middle class looking for resalable, unrecognised collectables or those who hunt retro ciche/ fashion.
The tragedy is that the bonuses rarely get into the shelves. I remember one woman who volunteered in a charity shop was actually spotting for her husband's upmarket antique shops. She worked under her maiden name and used her son's banger to come to 'work' leaving the BMW at home. She spotted expensive collectable from deceased estates, hiding the true value from the charity, put a $2 ticket on it and either she or a stooge would snap it up.

Examinator said...

One needs to remember that Children, particularly sons have a totally different SIGNIFICANCE in tribal sense. They ARE the parent's/ family's SS ...More hands to feed the family and more to look after elders when they themselves can no longer work or injured.
Hence your vid post of smaller families, less child mortality needs to be seen in the context of what is being substituted for that SS? This system Breaks down in the Urban/slum environment.