I’m Buried, but This Deserves Another Look
Erik Loomis at LG&M notes that Forbes is attempting to encourage age discrimination (no we’re not; wink, wink, nod, nod).
And it made me think of this post from Lance Mannion, which deserves to be read every day you can:
You get up for a stretch, wander out onto the floor to get a cup of coffee, give people the eye, remind them you’re here, still the boss. Not that they need the reminding. Good people. Hard workers. You hardly have to say a word to some of them. Work their asses off for half the money, which, you know, you’d like to pay them. Business is good, as in ok, but it’s not like you’re making the bucks so fast you can’t find space to put it all, it’s piling up so fast….
Sid. Look at him. Geezus. Five years younger than you and looks like he could be your father. Ok. That’s a bit of an exaggeration. But he’s not looking too good these days, is he? Too bad. He used to be such a dynamo. Worked like a hero. Put in seven days a week if you’d let him. Best you had. Then he turned sixty-five and it was like he hit a wall. Bam. Just knocked him flat and he’s never been able to get up again, not really. Mostly, for the past year, he comes in, goes through the motions. He’s become a real drag on the business. He really should hang it up. But what’s he gonna do? You always paid him a fair chunk of change. Never was going to make him rich, but he got by pretty well. But 2007, 2008. Everybody’s 401(k) took a big hit, then his wife got sick, and their house went under water. He’s going to need to collect full benefits on his Social Security. He needs to stick it out for one more year.
Oh wait. It’s 2020 now, isn’t it? They raised the retirement age for people Sid’s age back in 2011. He can’t collect full benefits until he’s 69. So he’s going to stick around for three more years!
Three?
Think about it. His wife’s health is shaky. Sid’s is none too good. No way he can make up for the difference in medical costs for what the vouchers won’t cover. Sid needs to work here till he drops just for the medical plan, which is no great shakes, it costs you both an arm and a leg, but it’s not like it’s suddenly got cheaper to go the doctor’s. Even a simple check-up dings you, never mind if you need something big taken care of.
No, Sid’s here for life, unless…
Nah, you couldn’t do that to Sid. Not after all the years he’s put in.
Could you?
There are many reasons I say people should hit his tip jar–he’s too good to be one of the people Brad DeLong but this one keeps coming back as one of the best, one of the two best posts ever on the Internet about working.* Read the whole thing. And hit his tip jar if you can.
*The other is Mark Thoma’s description of what it’s like to be downsized in a Company Town and have to look for a new job. Which, as usual, I haven’t been able to find recently.
ken
a corporation would fire Sid in a heartbeat. even a compassionate small business owner would eventually decide he can’t afford to pay Sid more than he contributes to the bottom line.
the answer is to stop the nonsense about raising the retirement age. young people and people who like their jobs think it’s “obvious” that the answer to longer life expectancies is to raise the retirement age. they can’t imagine that even if they are going to live longer people get old.
it’s probably too late to undo the increased retirement ages already enacted, but it may not be too late to educate the people about exactly what this means to them. under the current schedule of taxes and benefits the cost of not raising the retirement age amounts to about forty cents per week per worker per year. i think we can handle it. each worker can pay his own insurance. it’s not a burden on the young (they are the people who are going to get old), and it doesn’t cost “the government” a dime.
IBM has been following the “fire the Sid” playbook for about the last decade. If you’re on facebook check out the “Watching IBM” page for hundreds of horror stories of people being whacked right and left. Lately it includes areas mentioned by top management as “Growth/investment” plans like cloud and analytics.
The firings (they are not layoffs, there are no plans to rehire when/if business conditions improve) got quite a bit uglier in January when the severance policy got changed to 1 month (!!!) no matter how many years of service. A real trainwreck of human misery.
I’m 55 and (assuming I last that long) will complete my 20th year of service in September. So the target is on my back. I’m not counting on anything. Every day I leave with my badge is a good day.
Yes, read it:
“You’re contributing to his healthcare and his 401(K). He’s earning more and more vacation each day that he’s working for you. And as he gets older, you’re increasing the risk that he will cost your company more – maybe he gets injured or needs financial assistance because he’s not putting enough away for his retirement.”
and then the ending:
“But if you’re letting your overhead get too high and your profitability becomes negatively-impacted because you’re unable to make those hard choices, then you’re hurting everyone who depends on you.”
He forgot to mention the Unemployment Insurance, Workman’s Comp,, Disability Insurance, Sick Time (although now they managed to work it into PTO time so if you are sick, you burn your vacation), special accommodations for disability, Social Security, Medicare, etc. Cut a person and this disappears.
He is not afraid to pay for a young person who is cheaper in salary and has low overhead; but, he does not want to pay for the older person who has a higher salary and overhead. The older person may have paid for their salary in savings many times over in cost reductions and in efficiency. All of that is yesterday and what are you doing for me today approach?
The author hit upon what many believe really plagues the country, the cost of employment beyond a salary. Automation does not have the same type of overhead.
“compassionate small business boss…. oxymoron!
Dante had a special place in hades for seeing a human as a $.
But hey greed is good!
ilsm
that corner of hell must get pretty crowded. washington and jefferson and good dog trainers know that idealism can be relied on only for a short time. eventually something like the instinct for self preservation kicks in.
but that is not all bad news. we can arrange things so that by accounting for other people’s self interest we can arrange things to protect our own. the problem is that with all that idealism – ideology floating around it is hard for people to see the truth.
for example, i don’t expect to persuade “the rich” to pay for “the poor” forever. neither do i expect “the poor” to stop asking them to. but i like to think that if i could get the rich to understand they are NOT paying for Social Security, and get the poor to understand that ultimately no one else is going to pay it for them, they could both find it in their hearts to support a system that protects the poor trying to save some of their own money against the day that they will need it more than they do today.
The only way the factual and well documented IBM playbook differs from this story is in that their execs are not at all interested in hiring the un and underemployed children of the fired. They only want H1-Bs.
The business magazine has a track record of not so subtle old-dog whistling. They have published articles about age-related benefits expense management under the guise of ‘see what enlightened companies are doing’. They made no secret about their focus on shareholders over employees, although the top employees get wealthier by delivering the returns. There should be no surprise at why some companies have zero loyalty to employees.
They also lauded the benefits of Citizens United where their upper end target audience could anticipate gaining more influence. Literally anything to make a buck!
Hmmm:
Welcome to AB.
Automation can’t purchase what automation makes.
And, the companies have decided they should not have to pay for society. I guess they believe they are doing society a service? Or they are gifts to humanity?
“It’s 2020 now, isn’t it? They raised the retirement age for people Sid’s age back in 2011. He can’t collect full benefits until he’s 69. So he’s going to stick around for three more years!”
Incorrect. If Sid is 66 years old in the year 2020, he was born in 1954. Full retirement age for those born in 1954 is — sixty-six!
https://www.ssa.gov/planners/retire/1943.html
And he is eligible for Medicare.
How the 773H is his house underwater when he’s sixty-six years old? Did he buy his first house when he was 63? At 66 he should already have the mortgage paid off.
warren
let’s see, “it’s 2020 now…” should have given you the idea the story was “set in the future.”
as such you might have expected that a narrative set in the future might , for the purposes of the story, assume that something had happened between the real present (when the story was written…. check that out too) and the fictional future.
and, sadly, i have a real friend, in the real now, who is 66 and has a house with a substantial mortgage on it. stuff happens.
Coberly,
“They raised the retirement age for people Sid’s age back in 2011.”
THAT is in the PAST, isn’t it? But I now see that that article was written in 2011, and is being dredged up now.
As for your friend, having a “substantial” mortgage is far different from having one larger than the value of your house.
But let’s look at ol’ Sid in June, 2011, when this article was written. Born in 1954, he would have been 57 and working about 35 years, assuming a college education. (Let’s assume he graduated college in 1976, and started working that July, so that he has a half-year of work in 1976, and a half year in 2011.)
Let’s assume Sid is a median guy, making the median for his age bracket. (He’s he’s at the low end for college-educated folks.) If he saved 10% of his income, at 7% interest, he would have $415k in 2011. Even had he saved no more, that would be $760k in 2020, enough for a $30,000 income. Plus about $1200 per month in Social Security, and he’s over $44k per year. His wife’s Social Security would probably put them over $50k — without investing a dime after 2011.
But wait. If he had instead invested in an S&P500 index fund instead, (with 0.12% fees annually, more than twice what Vanguard charges), he’d have had $650k in 2011. Assuming no further investments, and only 5% return (he went conservative as retirement neared), he would have over $1M in 2020.
At that point, who cares if his mortgage IS larger than the value of his house? He could simply take the money out of his retirement account and pay it off.
But Sid’s employer has also been contributing! So Sid would have even more in his 401(k)!
warren
what you say is more or less true in theory. but real life rarely works out that way.
and it it did, it wouldn’t: you aren’t going to get an entire population of millionaires. economics is like the weather. not only is it unpredictasble, but it is full of negative feedback loops.
as far as your brilliant investment strategy…. and certainty that no one is underwater on their mortgages (because the banks foreclosed?)… i can give you a hint of the coberly retirement plan… i never had the money to “invest,” and certainly not the knowledge that i could go to Vanguard and get a reasonable “service fee,” i watched all (ALL) my friends lose their money in the market, and their own personal business ventures, wasted a lot of time in graduate school and unemployment, and finally got a job with an employer pension… at about the same time i realized the employer pension was not going to be enough, and the job turned out to be lousy, and i was getting too old to shop around, i started saving essentially all (ALL) of my less than median wage, and managed to retire, with my house paid for, by the age of 52. the nice thing about waiting until you are old to start to save is that inflation is no longer much of a factor.
now, i would bet… if i was the kind of person who made bets… that more people end up doing something like what i did, than do something like what you did. moreover, the “poor” never do anything at all…. they reach 62 or 65 (and get laid off) and Social Security comes as a saving angel. enough to live on, not what you wanted, but enough. and the people who do what you say… get caught in a big market downturn and can’t retire at all.
i won’t say i know everything, or the “best” way to plan your finances, but i will say that you don’t know everything, and your example of what Sid should have done… changed somewhat since “what he would have done” when you first wrote… is just not what happens in the real world. That’s why I like Social Security: it works in the real world. it’s not “get rich on wall street,” and it’s not “after the revolution the rich will buy us all pie.”
warren
your example ignores the effects of inflation. and no one has earned 7% on the market since 2008.
Coberly,
I’ll take your last point first. The 7% number I pulled out of my @$$. If you notice, I had my hypothetical investor get only 5% after 2011, having “going conservative” (which is stupid) leading into retirement.
“[No] one has earned 7% on the market since 2008.”
Really?! The S&P500 index closed at 890.64 December 30th, 2008. Friday’s close was 2099.06. That’s seven years and five months. (2099.06/980.64)^(1/(7*12+5)) = 1.00858767. 1.00858767^12 = 1.108.
WITHOUT DIVIDENDS, the S&P500 has increased 10.8% per year since 2008.
My retirement plan was simple — get a STEM degree, keep my technical knowledge current, and save the maximum possible in retirement accounts. There have certainly been setbacks. I did not buy a house until after our third child was born. I depleted my retirement account for the down payment. I have been unemployed — many times (one-contract wonders), and had to pay all of my first child’s birth cost because we had no insurance at that time. I have taken money out of retirement when I was unemployed, and my salary dropped 20% with the 2007-2008 recession, and has not recovered half that.
But I have always been heavily invested in stocks. There is really no other game in town for long-term investing. I do not care about market crashes or downturns. I invest mostly in index funds. I do not pick stocks or time the market.
YOUR retirement plan, however, does not seem very realistic. How did you save ALL of your money? No food? No mortgage? No rent? No utilities? Nothing? You have a sugar-mommy?
“[Certainty] no one is underwater on their mortgages….”
No sane person in his sixties, no.
“[The] people who do what you say… get caught in a big market downturn and can’t retire at all.”
Nonsense. The problem is the foolish advise to move one’s money out of the market as retirement approaches. If those are bad years, yes, he is screwed. But I intend to be retired a long time, and to provide for my wife even longer, and for my children and grandchildren after that. That means long-term investing, and that means stocks. Heck, if you have enough saved, you can live on dividends alone and the price be damned. In that case, a downturn in the last years before retirement is a Good Thing, because you can take advantage of catch-up contributions and buy when yields are higher.
And in my example, too, I only had Sid save 10% — including the employer match. And that only until age 57, after which he got only 5% return. Sensible people save more than that, and they do not stop at age 57.
warren
no. recompute the interest rate based on what you had in the market in 2007. my recollection is that the Dow was about 12,000. it’s now about 18,000 or 50% (including inflation) growth, or say about 5% per year, minus inflation about 2%.
if you have better numbers, or started in the market the day AFTER the bottom, you may have a different recollection. but, i would bet my recollection is closer to the experience of the average investor, and in fact the Wall Street journal in an article i read a month or so ago suggested that 2% real growth was about all you could expect these days.
pretty much the same “analysis” applies to the rest of your letter. i have no doubt that a person who is smart or lucky can do well in the market over the long run. i have grave doubts that the average person will do well. certainly a big fraction of the population will end up without enough to live on in retirement., that’s why SS was invented. FDR just didn’t think it up out of thin air. it was necessary.
and my “all” was hyperbole… a bit. i ate. i paid off my mortgage (in two years). but it cause me to tear my hair when people tell me they don’t have enough money to save for their retirement. that, of course, is another reason why SS had to be invented. most people aren’t smart enough to save.
and please note, you have rejiggered your original message which said essentially “no way Sid wouldn’t have themoney to retire.” now you are saying YOU had the money to retire and if Sid were only as smart as you, and if the law and the market did not follow the assumptions of the fictional story, then he would have had the money to retire.
i am saying future Sids are going to need their Social Security, at the current retirement age, and level of “promised benefits.” and they can have it just by paying an extra dollar a week each year into Social Security… then all the rest of that market smarts and luck won’t matter. though i am perfectly willing to let you make a living advising people how to manage their money. just, one, don’t kill Social Security: most people are going to need it. and, two, don’t think that EVERYONE can do it (retire rich)… that is a mathematical impossibility.
Uh, no, Warren. The indices assume dividend reinvestment (strangely but deliberately with NJ o tax effect). So your 10.8% nominal return is inclusive of dividends not WITHOUT them.
warren and ken
before we get into a fight over the exact woulda coulds shoulda earnings rate, let me first admit that i am in much the same plight as Sid…. my real time mental arithmetic is no longer what it used to be.
on the other hand, that’s not the point. or it shouldn’t be. we are… or i was…. talking about what the average person can reliably expect from the market. picking a pair of specific dates and computing the exact return is subject to a worse error than getting the exact arithmetic wrong: it’s the error of leading people to expect a high return (in this case by picking a market low as start date and a market high as finish date) that their actual chances of getting are not good, and certainly not certain. i don’t think Warren intends to mislead, but he does seem to me to get overenthusiastic and overstate his case.
i need to learn how not to get drawn into this kind of argument.
Ken, you are wrong. That is a Total Return Index. Different beast.
Coberly,
“recompute the interest rate based on what you had in the market in 2007”
Dude, YOU said, and I quote: “no one has earned 7% on the market since 2008”
But OK, let’s go back one more year. Using Shiller’s S&P500 data, Dec. 2007 was 1479.22, and at the end of May it was 2081.43. That’s 4.14% per year.
Pretty poor, but remember that we are also not re-investing dividends.
Guess what? When dividends are re-invested, that return goes to 6.35%.
Still not great, but what was the alternative? Did you pull all your money out of the market during or after the crash? Or did you ride the return which, with dividends, has been 14.686% per year since Dec. 2008?
Now, your point that we should be interested in “what the average person can reliably expect from the market.”
He can expect the best long-term investment available, with considerable volatility. But wait! Volatility, for the average Joe, is a Good Thing. Why? Because the average Joe is a 401(k) investor. Every paycheck, the same amount goes to his 401(k). He is dollar-cost-averaging. With a given long-term return, the more volatility there is, the more he will make. (That’s why I don’t care about market downturns.)
We’re talking about starting investing at age 25, with a seventy-year timeline. Seriously, is there any other choice but the stock market?
No, EVERYONE cannot retire rich, but just about ANYONE can. It does not take market smarts (I do not buy individual stocks, just index funds), nor does it take luck (the market returns depend on the forcing function, which is corporate profit, the volatility is just a bonus). It does take some courage. Courage to hold on in the down markets. The solution to that is, don’t read the market news! It also takes the discipline to invest regularly, and to not touch the money except in extreme times. (If you are unemployed for six months, the 10% early withdrawal penalty does not apply.)
No smarts. No luck. Just courage and discipline.
But we were not even talking about Average Joe. Average Joe is better off than his brother, Median Bob. Income is a Chi-squared distribution, not a Gaussian. The average is well above the median.
Warren
we can go round and round about this and not get anywhere.
I know people can do well on the market. I also know they can do very badly. The point of Social Security is as a hedge against doing badly, or never doing at all– that “courage and discipline” you speak of.
I did not “pull out of the market” because I was no longer in the market. I did well during the nineties and got out just in time. Not smart. Just lucky. I know other people who did not get out… and did not get to retire when they wanted to.
You are selling something that might work out fine for some people, and might not work at all for others. SS will work for everyone: not make them rich, but let them retire when they need to. As it happens the “cost” of Social Security is not so high that it prevents people from investing in whatever other plan suits their taste.
For a low income worker… say 20k in today’s market, SS costs them about $25 a week. Sure they could find something else to spend it on. But they can also find a way not to spend it. I know. Been there. Now, if they have to pay an extra tenth of one percent in order to keep their SS for the predicted future, that will cost them an extra forty cents per week. The Left is going to tell me “wah! they can’t afford it!” I say they can’t afford not to pay it. Assuming steady prices (gives the same answer as all the present value, inflation, and wage growth arithmetic, but in numbers that mean something that a person can understand today), that low income worker will pay about a hundred dollars a month while he is working and get a social security check of about eight hundred dollars a month when he retires. That low income worker will NEVER do any better than that. Your middle income or high income worker COULD do better…. unless something bad happens. But your middle to high income worker can easily afford to invest in “personal” savings from his after tax income. He would be foolish to not buy SS insurance. Since Roosevelt and I know something about people that it is not politically correct to say, I’ll just say that the country can’t afford to rely on the good sense, courage, and discipline of everyone, or even most everyone.
Warren
and you are waffling:
you are down to 6% since 2008, but that’s still “nominal”.. subtract inflation and you are down to what, 3%? and do you want to argue if that is an inflation figure that fairly represents costs to the elderly?
and all those people waiting eight years to get that 3% growth since 2008 are what? eight years older? how much does that mean to you when you are 65? (answer… eight more years of hoping not to get laid off from a job you hate or can no longer do. or … assuming you were sixty when you got fired, six years of living on the street waiting to collect a SS pension that is going to be about 25% less than it would have been because of all the zero income during your “high earning years”?
volatility is not a good thing when you are getting old. even when you are young and poor it can wipe you out.
by “market smarts” i don’t mean Warren Buffet smarts, i mean just Warren at Angry Bear smarts: most people just don’t have it. And there are plenty of people out there waiting to take his money by telling him that he looks smart and needs to buy this great deal that just came across his desk.
No, YOU are waffling. Since you say “since 2008,” then you want to include 2008, which would be “since 2007.”
Just to be clear, since 2007, the S&P500, with dividends re-invested, returned 6.35% per year. Since 2008, it has returned 14.68% per year.
But what you are saying is that it is the government’s job to protect people from themselves? People are too stupid, lazy, and undisciplined to save for their own retirement? Why don’t we cut out the middle-man, and just let people take money from their children and grandchildren?
Gee and here I thought we had a discussion going about people getting fired merely because some dipstick manager thought they were too old and unhealthy to keep around. An examination of the immorality (or not as some people may have it) of that philisophy. It’s one I have a significant amount of first hand experience with as I imagine others do too.
But apparently it’s another rerun of Privatize It/Preserve it. Ok then.
Warren
we are not getting anywhere.
Well, let’s look at that, A.S.
Does an employer have a duty to continue to pay underperforming employees? If so, how far does that duty go? Until the company goes bankrupt? What would be “acceptable losses”?
am soc
maybe not quite. Warren is talking about something he is too full of to see what i am talking about.
but while i have seen the bad manager get rid of a good worker just because he is old or because the statistics show that older workers cost more than younger workers, i thought the “story” in the original post assumed that the worker was indeed less productive than he had been. that can happen.
the remedies are different. in the first case you need a better union. in the second case you need to recognize that people do get old even if they are going to “live longer” and they need to be able to retire probably by age 60 or so, depending on a lot of factors, the most important of which is do they like their work well enough to keep working, and can they get paid enough to make that a better deal for them than retiring.
i am inclined to guess that most people will want to retire and if they have paid for it themselves… as they do with Soc Sec … who is to tell them they can’t retire? and i would expect that those who don’t want to retire can keep on working as long as they want or can
No, Coberly, I do not think we are. I will continue to push financial discipline and self-reliance — no matter how much or how little you make, at least 10% to charity and 10% to savings (generally in tax-deferred index funds),and live on the 80%.
You will continue to push reliance on the government.
Warren
the reason we are not getting anywhere is because you can’t read.
push whatever you want, but don’t imagine you know what I am pushing because you have no idea.
When you write “since 2008” when you mean “since 2007,” I think the fault it not in my reading.
“[In] the first case you need a better union.”
Many are not even allowed to unionize.
“[In] the second case you need to recognize that people do get old even if they are going to ‘live longer’ and they need to be able to retire probably by age 60 or so, depending on a lot of factors, the most important of which is do they like their work well enough to keep working, and can they get paid enough to make that a better deal for them than retiring.”
There are really two different scenarios in this case — skilled labor and unskilled labor. Skilled labor, such as plumbers, electricians, carpenters, auto mechanics, etc., do not see the age-related productivity declines as early as unskilled labor does. Indeed, skilled labor generally does not lose productivity until past full Social Security retirement age.
So the issue is unskilled labor. Should such a person continue to get raises as his productivity declines, or should he be paid according to his productivity? There are very few industries that pay by productivity, rather than by the hour. One is (sometimes) the moving industry. As a SOBWOM (Strong of Back, Weak of Mind) mover, I was sometimes paid by the pound. If it took us four hours or eight, the pay was the same based on the weight. Some days, we wanted to knock off early, so we worked our asses off to get it done in the morning. (Got us better tips, too.) Some days, we we had nothing better to do, so we took it easy.
That’s generally not possible. So, rather than laying off people as they get older, start reducing their pay as their productivity declines. To balance that, let them start taking partial Social Security while they are still working.
“[If] they have paid for it themselves… as they do with Soc Sec….”
Question: If the program were ended now, would there be enough in the SSTF to pay all current and future beneficiaries according to the contributions they have already made?
Warren
yes, that’s as good an example as any. you read like a fundamentalist. you think the words…AS YOU UNDERSTAND THEM… are set in concrete and can ONLY be understood the way you understood them the first time. that is not generally true, even in comic books. words are an attempt by the author to communicate an idea. they often fail to mean to the reader what the author meant. this is usually not important, but when the issue IS important and the author tries to make his meaning more clear and the reader insists that “no, what i thought you meant is what you meant and i’m going to stick with that” then the reader is not “reading” very well.
in this particular case i said “since 2008” and meant something iike “since the crash of 2008 (or so) your earnings based on where you were before the crash” have not been the 7% you claimed, especially if you mean “real” earnings. you then picked a date in 2008 near the market low (i don’t follow these things closely, so i don’t know “exactly” what date that was) and tried to sell the idea that all that mattered was the rate of earnings (nominal) between the date of the low and the date of the subsequent high.
i tried to explain what i thought was wrong with that reasoning, and you … to your credit…. offered a rate of earnings based on the pre-crash level to the present high. so far so good, but you were still offering “nominal” earnings, when people have to live on “real” earnings, and you did not consider that the present high may not fairly represent “average” growth.
when one runs a line through a series of points to establish an average rate of growth one does not run it though the outliers near the extreme ends.
more important, from my point of view, is that you don’t seem to understand that over eight years a lot of people who wanted, or needed, to retire were not able to because they had not recovered the money they “lost” in the crash.
and we go round and round about this.
you insist that you know THE truth, including what I think.
so back to the original point here: someone who knows how to read knows how to allow for what the author might have meant… not because the author has no responsibility to “say what he means” but because what he means may be just enough different from what you thought that it is important to try to get clear about what both of you are talking about. i see no effort from you, indeed no possibility that you can, be flexible enough to understand what i am trying to say, even if i was perfectly clear.
warren
no. the Trust Fund has only enough money to help pay for the Boomer retirement through about 2030. That’s what it was intended to do. Otherwise SS is designed to be pay as you go.
warren
your prescription for economic utopia is like all other such prescriptions: wonderful in theory but maybe not so much in the real world.
so here is a suggestion:
look at the real world. how are people actually doing with their investments? how many people reach retirement age without enough to live on?
then as an exercise try to calculate the return on investments over various periods of time reflecting people’s actual behavior. i have read that “over every forty year period, the return from investments is always positive.” so be it, but what about people who can’t wait the whole forty years, and how “positive” is it, and remember that the bulk of their investment (some percent of their higher wages in their later years) will mostly lie in the few years before retirement, so there may not be much time for those high rates of return to have much effect on their final “return,” while a market crash within five or ten years of the day they want to retire, might wipe out their savings…
now, i don’t know enough to show this, let alone prove it, but i suspect it’s near the truth, and may account for why those incredible returns you cite are not making everybody rich.
which raises another question: if everyone invests as you suggest and “does well” what does that mean to actual returns? i don’t think you can have an entire population of elderly millionaires (or whatever dollar amount constitutes living “very well.” what you will get is inflation in stock prices, and a failing economy because no one is buying anything because they are “investing” in stocks.
and finally, what happens to an economy where a very large number of people reach retirement age without enough to live on? i would expect most people to try to save more, resulting in a depression, and the available money for investment would not be taken up because there would be nothing to invest in.
again, i can’t say that this is “so.” but look at what is happening now in the real world.
and remember that Social Security is not a government hand out. the workers pay for it. that is they “save” for it. exactly as you suggest. except their savings is ONLY that part of their wages that they need to save to pay for the basics in retirement… exactly that part of any private investment that would go to the payouts to people cashing in their stocks and bonds during their retirement.
OK, Coberly, so you mis-wrote the “since 2008” statement. Got it.
But to get an average rate of return, we do need to look at start and end times. When dealing with retirement, we are talking long-term investing. For long-term investing, no other investment vehicle beats corporate stocks.
Your example of the person near retirement who think he cannot retire because of a recent market downturn is exactly the problem with current retirement planning — the idea that one should move out of stocks as one nears and enters retirement. I believe this to be short-sighted. Given a 65-year-old couple, there is a 50% chance than at least one of them will live to age 90, and a 20% chance than one of them will live to age 95. That’s 25-30 years. And do you not want to leave anything to your children and grandchildren?
That’s long-term investing. That means corporate stocks.
So if you retire right at the bottom of a crash, it is very bad if you then move everything into bonds. (How’s the corporate bond yield these days?) But if you’re still mainly in stocks, so what?! You still own the same number of shares as before the downturn, and will benefit accordingly in the following boom.
“SS is designed to be pay as you go.”
That contradicts your statement that people pay for their own Social Security.
Warren
here we go again.
so let me first say that your point about keeping your stocks when you retire in a down market may be valid. i don’t know enough to evaluate it. i have my doubts, but i don’t know enough.
so now turn to your very interesting, but hardly unusual, way of interpreting miscommunications, you state positively that I mis-wrote. no, you misunderstood. more to the point my “misstatement” assumed a view of reality, and mathematics, that you do not share. i would not, and do not believe it is valid, to represent the earnings of a stock based on an arbitrary start date and an arbitrary finish date. we sort of straightened that out with your subsequently offering a more realistic idea of earnings by using the pre-fall stock price. but you kept on insisting that i “mis-wrote,” meaning you weren’t getting the point.
well, maybe no harm done, except that it indicates a rigidity that doesn’t argue well for future understanding. and that’s how it turned out. i attempted to explain, or at least present several other ideas in the course of the conversation that you either ignored or completely misunderstood with no hope of our correcting the misunderstanding.
and this all begin with a fictional “set in the future” story about the probable effect of an increase in the retirement age, which you dismissed with a strong “couldn’t happen.” and your argument turned out to be “couldn’t happen IF everyone did what i (that is warren) recommend.
well, maybe that is true, i don’t think it is likely, but i can’t prove it. what i can say is that what you recommend is not what is happening in the real world, and the situation described in the story IS happening right now, and seems very likely, to me, to happen much worse if the SS retirement age is increased… the original proposition under discussion.
as far as pay as you go not being “the worker pays for his own retirement.” I think i’ll say that your rigidity of thinking prevents you from understanding it.
the worker who contributes to SS in return for the promise to be able to get his money back with interest later is no different, in principle, from the worker who contributes his money to “the stock market” in return for a promise to get his money back with interest later…. if all goes well. if General Motors goes bankrupt how many of the investors do you expect will get their money back? which is more likely to go bankrupt General Motors or the United Sates?… or more accurately a pension system that relies on the need that future workers will have to “invest” in order to insure they will have at least enough to retire on.
really, you won’t forgive me if i say, your concept that there is a contradiction between “worker pays” and “pay as you go” shows that you really understand nothing at all about money and what it “really” is in the real world.
Obviously the question implied by the article above is sort of a complicated one. Bankruptcy helps nobody including the remaining employees.
But my real world experience in an actual fortune 100 corporation has revealed a quite aggressive practice of firing a lot of “Sids” for no fault of their own while simultaneously changing the long standing HR policy of 2 weeks severance per year of service to 1 month severance period. No longer how long they worked there.
Meanwhile, far from going bankrupt the CEO and executives have practiced a fairly asinine strategy of financial engineering plowing billions of dollars over the last decade ($70B and counting) into stock buybacks and dividend sweeteners.
I would put it to you, do the managers have the right to create and exacerbate human misery while playing funny speculative games with largely borrowed money, mostly to enrich themselves via stock grants and options?
am soc
let me add that hard physical labor is not the only reason workers need to retire in their early sixties.
cubicle work drives people insane. they are desperate to retire. and if they are willing to pay for it themselves why should we stop them?
I’m not talking about anybody deciding to retire. I’m talking about pinhead greedy managers and execs deciding for them. While simultaneously changing the rules to screw them out of expected severance pay and in some cases defined benefit pension plans. Mostly so they can be replaced by H1Bs
You can talk about people deciding to retire whenever and wherever you want of course. As well as who/how to pay. It’s fine.
But there should be some kind of accounting for the thinking and strategy expressed in the fable at the top of this blog post. IMO anyway.
am soc
i agree. but i put that under the heading of ending predatory capitalism.
meanwhile SS protects workers from the worst aspects of predatory capitalism. and it’s important not to play into the idea that we will never be too old to work.
From the beginning of 2008 to the end of 2015 the Dow Jones gained 31%, for a compound interest rate of about 3% (nominal). How does this square with Warren’s 14%?
it is entirely possible the mistake is mine.
oh, maybe i see. he is using S&P starting at the low in 2008, and reinvesting dividends.
and for that the “interest” rate is more than 3 times the Dow Jones from the beginning of 2008 to the end of 2015.
if that tiny change in “investing strategy” and timing can produce that huge a difference in return, i wonder if it could work the other way and someone following Warren’s plan could get 3% nominal instead of the 14% nominal he expected.
3% nominal is lower than SS returns on even the highest incomes. SS returns on lowest incomes is more like 10% depending on a number of factors like “married” and do you count “the boss’s contribution” as “your money” before or after you start collecting SS.
i think this way lies madness.
or at least disagreeableness.
oops. that 10% for the low earner from SS is “real” not nominal.
oh, and i learned this from Andrew Biggs. your “peak earning” years are well before you retire. Employers stop giving raises to older workers so they fall behind in real dollars.
Biggs used this to show that SS was “too generous.” compared to standard pension (and financial planning.)
so it looks like Warren doesn’t have to worry about cutting the wages of older workers to reflect their reduced productivity after all.
No, I dismissed it with a DIDN’T happen, because that increase in the retirement age supposedly happened in 2011. Even if it had happened, the decrease in his SS benefit would only be about 12%.
“[The] situation described in the story IS happening right now.”
I still contend that anyone whose house is underwater at age 65 has made some Very Bad Decisions, and not just Typically Bad Decisions.
“[The] worker who contributes to SS….”
WOAH!! Hold on there, pardner. CONTRIBUTES?! You mean it’s VOLUNTARY?! That’s news.
“… in return for the promise to be able to get his money back with interest later is no different, in principle, from the worker who contributes his money to ‘the stock market’ in return for a promise to get his money back with interest later.”
Really? So, what, exactly, does a person OWN when he “contributes” to Social Security? The Courts have ruled that that “promise” can be revoked or changed at any time by the government, as our hypothetical story about an increase in the retirement age demonstrates. When one buys shares of a company’s stock, he becomes an owner of that company. That is VERY different from the promise that you will be able to take money from your children and grandchildren later — IF you live that long. If you don’t, too bad. But, if a stockholder dies, his heirs get it (except what the government takes in death taxes, which is negligible for most of us).
“[If] General Motors goes bankrupt how many of the investors do you expect will get their money back?”
That would be better phrased not as a hypothetical: “When General Motors went bankrupt, how many investors got their money back?”
Despite campaign rhetoric to the contrary, General Motors DID go bankrupt, and Obama illegally screwed the bondholders (who have legal first priority) to give a pay-off to the unions.
The owners, the stockholders, basically lost everything. But so what? Seriously. That is why I DO NOT BUY INDIVIDUAL STOCKS. I buy index funds.
“[Which] is more likely to go bankrupt General Motors or the United Sates?”
Obviously, any one company is more likely to go bankrupt. But let me ask you this, “Which is more likely to go bankrupt, the Unites States, or every company in the Wilshire 5000?”
“From the beginning of 2008 to the end of 2015 the Dow Jones gained 31%, for a compound interest rate of about 3% (nominal). How does this square with Warren’s 14%?”
Because “from the beginning of 2008” is what the phrase “since 2007” means, not what the phrase “since 2008” means.
Coberly originally said, “since 2008.” He has amended that.
“[Your] “peak earning” years are well before you retire. Employers stop giving raises to older workers so they fall behind in real dollars.”
That is generally correct. Often, raises “trickle down” from the top — upper management just says, “You have a 5% raise pool to distribute to your employees.” But if you give a 5% raise to the 20-somethings, they will go to another company. And rightly so. The difference between one year of experience and two is huge compared to the difference between 30 and 31 years of experience. It is not reasonable to give everyone 5% raises. So the 20-somethings get 10% raises and the 50-somethings get 1%.
Where did you get that? The SSA ran their own simulations, and the best anyone did was 6.79%:
———————–
–Lower-income workers come out ahead. Low-income workers enjoy higher rates of return by design, because Social Security’s benefit formula is weighted toward lower-earning beneficiaries and their payroll tax contributions will be relatively lower. A very low-income couple born in 1943 will receive a 6.79 percent annual return, compared with 3.92 percent for their high-earning counterparts.
http://www.reuters.com/article/us-column-miller-socialsecurity-idUSBRE89H0YG20121018
———————–
Warren
you’ll have to forgive me. English is my native language. “Since 2008” is unspecific as to some exact date. Since you are the one who thinks it’s foolish to sell out in a market crash i would think you’d be attentive to the return of your money (note: not return “on”) after the crash. Even if you blithely assume all the people near retirement age can live on their expectations of high returns for the rest of their lives. Let’s see, “only 12%” less than they expected. What was the phrase: One dollar more than you need…paradise; one dollar less than you need… hell. The SS check which you have been forced to pay fo,r and will not get if you get deported as an alien Communist, is just barely enough to live on. And that is intentional so that the “premium” you pay will be as low as possible… only 12% of your pay… leaving you all the rest of to do as you wish…. including, of course, paying taxes the the democratically elected government the Founding Fathers thought such a good idea at the time.
as for the return on investment… you have to look at all the possible combinations. anyway those are REAL returns and they assume that the employers share was always the employees money. since low income workers have no leverage i assume it doesn’t become the workers money until they get the retirement check.
i prefer the real world to the imaginary world of economists.
“’Since 2008′ is unspecific as to some exact date.”
On the contrary, it is quite specific — the closing price on the last day of 2008. That was the date you specified, and so it was the closing price on that day that I used. If you have said, “since June, 2008,” I would have used the closing price of June 30th, 2008.
“Since you are the one who thinks it’s foolish to sell out in a market crash i would think you’d be attentive to the return of your money (note: not return ‘on’) after the crash.”
Quite the contrary, actually. I really do not pay attention to the market at all. Since I will make no choices based on market fluctuations, it really does not matter to me what the market is doing now, or what it has done in the past, or what it will do in the future. Historically, there has simply been no better long-term investment than corporate stocks. There may be an investment out there now that will be, but I am not smart enough to figure out what it might be, so I do not try.
“Even if you blithely assume all the people near retirement age can live on their expectations of high returns for the rest of their lives.”
I don’t. But I do know that at a 4% annual withdrawal rate, historically one would do best leaving his money in the stock market. (Use Robert Shiller’s stock market data, and run the numbers yourself. http://www.econ.yale.edu/~shiller/data.htm) I assume that that pattern, which has held for 100 years, is a good guide.
“… paying taxes the democratically elected government the Founding Fathers thought such a good idea at the time.”
The Founding Fathers did NOT think that was a Good Idea, which is why the 16th Amendment was necessary.
“[As] for the return on investment… you have to look at all the possible combinations.”
They did. The TOP return was 6.79%. So I ask again, Where did you get the 10% return number?
“[Anyway] those are REAL returns and they assume that the employers share was always the employees money. since low income workers have no leverage i assume it doesn’t become the workers money until they get the retirement check.”
Incorrect. If it were the employees’ money, their heirs would have claim on it if the “owner” died early. They do not. The government takes the money, and it is the government’s money.
Warren
i thought i’d look into some stock market data. looks to me like your S&P 500 didn’t do very well from 2000 to 2009 (no idea what day)
negative returns. kind of hard on someone wanting to retire in that decade.
now, i don’t claim to really know anything about this, but it still looks to me like the ordinary worker is well advised to keep that old SS just in case…
don’t really want to continue this conversation. a bit like talking to a bulletin board. just thought i’d let you know your argument wasn’t being borne out by other sources.
the founding fathers brought us democracy. democracy brings us taxes. the ff didn’t contemplate income taxes. the 16th amendment… brought to you by democracy…did. SS…brought to you be democracy…brought you SS “taxes” not really a tax, but forced savings. some people need to be forced. that’s why democracy brought you speed limits and traffic signals.
i’ll try to look at your cite for SS return on investment. but i trust my own calculations. i tend to look harder at details than most people.
warren
i read it very fast so i may have missed something.
the returns are “real”
the returns you cite are for married couple… they are better than individual returns
for the low earner i did not count the employer share as the workers money, so his return would be about twice the figure you cited.
i don’t count the employers share (i did count it in another computation) because i don’t think the worker would get the employers share without Social Security. i did count the employers share in the high earner because i figured he had the leverage to get the employers share in the absence of SS, even if he wasn’t his own boss.
now, i think you should back and read the whole article slowly, and see if you don’t notice some other things. like “guaranteed” hard to quantify (hint: “priceless”)
oh, and the lower returns to future workers assume (i think) no tax increase but a return of 25% less because “unfunded.” i am pretty sure i did my calculation based on assuming the workers would pay the needed tax increase.
“i thought i’d look into some stock market data. looks to me like your S&P 500 didn’t do very well from 2000 to 2009 (no idea what day)
“negative returns. kind of hard on someone wanting to retire in that decade.”
So you would think. But you would be wrong.
At the low point of the S&P500 index in 2009, it’s dividend yield was over 3.5%! Over that last decade, he would be accumulating more shares with his 401(k) contributions (and dividend re-investments) at fire-sale prices!
No, my friend, you have it backward. Image your last decade before retirement is a market boom. As you try to pad your nest-egg, the prices you have to pay for shares of companies keep getting higher, bond yields are a sad joke, and you can look forward to a down market shortly after you retire,
But if you are a long-term investor, as you should be, what better asset class is there than corporate stocks?
“the returns you cite are for married couple… they are better than individual returns”
Exactly, and best of those married couples got 6.79%. Individuals did worse.
“for the low earner i did not count the employer share as the workers money, so his return would be about twice the figure you cited.”
It doesn’t work that way. Let me give you an example.
$1 at 7% interest for 30 years yields $7.61. To yield $15.22, you do not need 14% returns, but only 9.5%. So your hypothetical couple STILL falls behind the typical 30-year returns of the S&P500, which are about 10.5%.
” i think you should back and read the whole article slowly, and see if you don’t notice some other things. like ‘guaranteed’ hard to quantify”
What guarantee?
“and the lower returns to future workers assume (i think) no tax increase but a return of 25% less because ‘unfunded.'”
So, there really is no guarantee, is there?
And, of course, it is worse for Blacks, too. They die earlier than Whites do, so they get screwed out of a good chunk of their benefits. If, like a 401(k), they could pass that on to their children…. Well, we wouldn’t want them getting out of dependency, would we? That would be bad for the Party.
first comment: you may be right, but where are the yachts?
well, your second comment was mostly wrong, but i don’t have time to explain it to you. (it’s not that what you say is wrong — exactly — but what you say misses the point entirely.)
“Where are the yachts?”
EXACTLY!! The yachts are going to the people who give the standard advise, not to those they advise. Usually those high-paid advisers are advising the purchase of this stock or that mutual fund, and taking commissions along the way. They get commissions on the sales end, too, so it is good for the advisers to advise moving out of stocks and into bonds. But if you sock it all into index funds or SPDR’s, re-investing dividends, and you can mostly live on the dividends after retirement, your sales are kept to a bare minimum, minimizing transaction fees.
When you do have the time, do let me know what I got wrong.
Warren
as far as i know you are right about investing. but i can’t feel as good about it as you do.
and i take it as a fact of life and history that most ordinary workers will not have enough to retire on if left to the mercies of the market.
SS is insurance, not only for them, but for the country. Your stocks would not do well if most workers were seriously aftraid of deep poverty when they get old.
SS is a pretty good deal. And if stocks are as good as you say they are, SS leaves plenty of money for all the poorest to “invest” if that’s what they want to do.
I may get back to you… but not soon. You are exasperating to argue with because you don’t read the details and don’t consider the other possibilities. On the other hand, it would probably do me good to listen to your arguments and investigate them. Who knows, i might learn something.
But for now I really have other things I have to do.
“[I] take it as a fact of life and history that most ordinary workers will not have enough to retire on if left to the mercies of the market.”
Well, they have to the discipline to put the money IN the market first, and the discipline to leave it there in down markets. The thing is, investors are not left to the mercies of the market, but to the mercies of their own self-discipline.
———————–
“[If] stocks are as good as you say they are, SS leaves plenty of money for all the poorest to ‘invest’ if that’s what they want to do.”
I honestly have absolutely no idea what you mean by that statement. Do you mean that the FICA tax is so low that “all the poorest” have “plenty of money” to invest in stocks?
——————-
“SS is insurance, not only for them, but for the country.”
How is it “insurance for the country”?
——————-
“SS is a pretty good deal.”
For those without the discipline to take care of themselves, I suppose it is.