HOW MUCH MONEY DOES A MAN NEED
by Dale Coberly
HOW MUCH MONEY DOES A MAN NEED
A morality tale
Leo Tolstoy tells a story about a Russian peasant who makes a deal with the Devil. The devil will give the man as much land as he can walk around in one day. But, the devil warns him (the devil always tells the objective truth) if he does not come back to the place where he started from by the time the sun sets, all the land will spill out of the gap and he will get nothing.
So the man starts out on his walk very early in the morning with modest intentions. But he sees a bit of nice land he’d like to add to his estate, and then another, and another, so he keeps walking just a little further than he intended. Suddenly he notices that the sun is going down, and he is nowhere near the place where he started. So he runs for it. And he runs. And he runs.
I won’t spoil the story for those who can’t see how it ends, but I believe Tolstoy called it “How Much Land Does A Man Need?”
I was thinking about this after a futile argument with some people who think they are friends of Social Security, while I was recalculating the “returns on investment” at a given percent with a constant input. I knew the answer was something like “you double your money in about 40 years at about 3%. and double it in about 30 years at about 4%. There is a reason for the “about.”
What I see people do is calculate the exact amount to the penny without regard for what they are actually doing. It seems to me that if you wait forty years to cash out, you have waited too long. And after about 30 years you would have about 86% as much money at 3% as you would have gotten at 4%. Aside from the problem of whether what you will want to buy when you are 60 or 70 is the same as, or “worth” the same as, what you want to buy when you are 30, there is the question of whether there is more safety in that 3% investment, and whether getting “only” 86% of what you “could have” gotten is going to be such a hardship.
It is easy for me to imagine a man working hard and saving harder and reaching the age of 65… or 67 is it now? and going to be 69 soon? you don’t say. Reaching this age with an extra million dollars in the bank and dying before he can enjoy it. Or realizing that he has already lost his life by working so hard so long and thinking only about money. Or reaching old age and having a million dollars squeezed out of the work of others. Or reaching the age when he would really like to quit, and seeing his millions disappear as the market changes.
I knew a man this happened to. He invested in a business that became obsolete. So all he was left with was his Social Security. And the old guy kept telling us that Social Security was a fraud and a theft. And “if only” he had kept his Social Security taxes he “could have” invested it in something that “would have” made him rich. Some people really do never learn.
Another way to look at this would be, suppose the Devil offers you a bet. You can have a thousand dollars a month to live on, or he can toss a coin. If it comes up heads you get a million dollars: if it comes up tails, you get nothing. Now the thing is, the devil can use an honest coin and still win the bet.
You make a valid point, however the objection many people have with SS is that given the demographics of the situation, people my age are paying into a system from which we will never collect. Or what we will collect will be worth much less than what people today collect and only considered a small supplement to retirement income. Clearly some generation is going to take the financial hit for this unsustainable system, and currently, it appears that generation is mine.
jack
you ought to know better. the system is only unstable because the well financed enemies are trying to destroy it and the ignorant public is letting them do it.
social security can last forever with NO CHANGES AT ALL. Professor Rosser is right. Although I argue that people would be smarter to raise their own “tax” a tiny amount so they can enjoy the same “replacement rate” as people do today. Fact is, if they were willing to live a little more simply, or reconfigure the payout formula, there would be no need to raise the tax at all.
under social security you will ALWAYS collect more than you paid in. that wage indexing thing.
unless of course there is a universal plague, famine, and war at the same time. in which case social security would still be the most you could hope for.
Jack – of course that objection is based on mis-information deliberately spread by those who wish to steal Social Security from those who’ve paid into it. As long as they don’t have their way, you will receive Social Security. Worst cast benefits may be slightly reduced from what they could be if the system is fully funded, but you would still receive more than current recipients even in the pessimistic case.
try to understand
the “demographics” has already been paid for. the boomers paid in advance. the future “shortfall” will be because people are living longer. if these same people pay (in advance) for their own longer life expectancy with tax increases that amount to twenty cents per week per year, they will get their money back.
when you hear a liar like Dick Cheney talking about “the iron law of demographics” you need to check to see if his fingers are crossed.
i would say the same about Peter Orszag and “the iron law of accounting” but I don’t know if Orszag is a liar or just a fool.
A major controversy is whether social security benefits should be “progressive” in the sense that term is used in taxation. In other words, should those who pay less into the system receive proportionally more than those that put in more. The current system, despite false claims that the system is not progressive – even “regressive” – is strongly progressive already. (The benefit-contribution curve is convex down.) There are also additional taxes on retirees who have other income above a given limit (and this additional taxation includes otherwise tax-free income from municipal bonds). Now there a push to more formally tax savings by reducing benefits further for those who have saved for retirement.
Many of us think the system should keep a form of its current progressive structure: Regardless of how much you paid in, we could all receive the same amount in retirement with no penalty for having saved for retirement. The amount of the payment should be enough for basic humane living expenses. Those who saved nothing will live in dignity but without luxury, while those who have saved will be able to enjoy additional luxuries for which they have saved.
tew
you are exactly right. there is no place for “means testing” Social Security. you pays in, you get what you pays for. yes the payout formula is “progressive”. that’s how it pays for the “insurance” against failure to thrive. even the tax on benefits… which i think is ill considered… is actually a tax on income, so marginally defensible.
in the present climate i wouldn’t change anything about SS, except possibly write a sufficient “tax increase” into law triggered by the needs of the future retirees themselves. the projected increase is too small to be felt by anyone.
except those who are sure, just sure, that they would invest that extra twenty cents a week in their roth IRA and retire rich.
well, the truth will out.
the personal motivation for this essay came when a friend revealed that he preferred raising the retirement age to spending an extra five dollars a week , which he would rather invest in his Roth IRA.
I don’t know if he was keeping in mind that by the time this extra five dollars a week showed up in his payroll tax his income would have increased a hundred dollars a week.
Of course you can see why he would have needed ALL of that extra hundred for the necessities of life, and couldn’t afford to save the five dollars to insure his own retirement, much less allow the servants to save for theirs.
“you double your money in about 40 years at about 3%. and double it in about 30 years at about 4%. There is a reason for the “about.”
There’s some relatively easy — thanks to Google — math to compute those things. 40 years at 3%? Go to http://www.google.com and type in 1.03 ** 40, and it will tell you that your return will be 3.262 times your investment. How long to double? There’s an equation for that of course, but I can’t be bothered to work it out and certainly don’t have it cluttering up what is left of a brain. So I’d just use “successive approximation” (guess ’til you get the right answer). Which is really close to 1.03 ** 23.45. i.e. 23.45 years.
Anyone who thinks they can do better than Social Security (not you necessarily) really ought to be familiar with this math — and how to correct it for taxes and inflation. If they aren’t their opinions are coming from a vacuum.
The big problem with Social Security is that it’ has a pretty decent return, but the amount of savings is not enough to live comfortably on unless you like ramen a lot and plan to spend your golden years sleeping in the back of your van out in our ever shrinking supply of public land. I could actually get with that program if I didn’t have a family, but I don’t think most Americans would be wild about it.
So saving and planning really are a necessity. I was fortunate, I made enough money when I was younger that my wife and I were able to fund the kid’s college funds, set aside savings, quit building expensive baubles for the military and move to someplace civilized. Most people aren’t that lucky and are, I fear, going to be in some amount of financial trouble when they retire unless they save a lot more than they are probably socking away.
Check out the rule of 72…
VtCodger–You’re right that SS provides only a percentage of what you earned during your working life. It’s nowhere near the 80% of earnings that most people need to live comfortably when they stop working. The trade-off is that SS is absolutely secure and will never be any less than your initial basic benefit amount. Whatever you can amass on top of SS is yours, no questions asked. So, VtC is right that the big complaint is that it’s not more.
Well, as Coberly points out, we could always pay more FICA and bump up the amount. Or, we could institute a supplemental savings program like federal employees have (called the Thrift Savings Plan.) The federal TSP has a matching funds provision and can be invested in a package of securities and equities. Secure savings and matching funds from the federal govt/employer contributions would give retirement security and higher benefits.
But, I have an even more radical suggestion. How about we beef up technical and professional education opportunities, establish goverment support for promising start-up industries or public works, and so on. The result would be more people working for higher wages and a higher net SS benefit through increased FICA contributions. More jobs for more people at higher wages with an opportunity to train to get those good jobs sounds like a deal everyone can get behind. And, anyone who could invest more would have access to the same investment opportunities as now, of course.
Obviously, I haven’t done any math on my wild-eyed ideas but I would certainly recommend that we reinvest in our industry and work force. We all know you don’t get something for nothing. What we are doing now to build our economy is nothing. And we know what that’ll get us. Nancy Ortiz
VT Codger
I did the math on my trusty spread sheet. I won’t tell you the answer because, as you point out, unless you count in all the externals it is at best ‘about.’
The amount of saving, and the return, on Social Security are kept low so that you CAN invest in other things if you want, and get that higher return if you can. But just between you and me I can live on a lot less than the average SS benefit, not to say the 2000 a month that “high earners” will get (in today’s money). And I never eat top ramen. or sleep in my car. i did send my kid to college, bought my own house, and have a car that is reliable and gets there as soon as anybody else.
rfm
the rule of 72 does not apply. i said “with constant input.” Take a hundred dollars a year and invest it at 3%. keep investing another hundred dollars each year. You will double your money in about 40 years. Do the same at 4% and you will double it in about 30 years. The math is the same if you take a thousand dollars a year, or a hundred dollars a week (5200 a year).
It’s always possible I did the arithmetic wrong, but let’s make sure we are both solving the same problem.
Codger
see reply to rfm.
This is the same story my parents spoke in the 1960’s they did not expect to get anything out of it. Yet they finally got 16 and 19 years of benefits before they died. I suspect that this sort of story has been heard on the right wing since at least the 1950’s.
BTW SS is sort of a welfare system in that it is an extremly progressive in the benefit calculation, so that for a top earner it is not as good a deal as for a person at minimum wage, but that is by design to provide a floor amount for people to live on.
lyle
it’s by design to provide insurance for even top earners when their top earnings let them down.
Don’t have a problem with the post, and don’t have a problem with Social Security, and would even be willing to contribute a little more to ensure it works, and that it would be there for me.
The main problem with me is two things:
1.) Do I really beleive it will be there for me and actually work in a reasonable fashion? NO!-I Don’t. You can run the math all you want, and predict the future to the best of your knowledge, but still not gonna believe it till I see it. Doesn’t mean I want to do anyway with it, just means I’m fine with it being a necessary evil.
2.) Let’s quit all the B.S about how this is “So great we have a built in insurance program against poverty. And the “Fear the poor, cause they will eat you,” It’s F’n welfare for christ sake, nothing to be proud of. Doesn’t mean I want to do anyway with it, just means I’m fine with it being a necessary evil.
For the demographics I am talking about, the only thing that matters is how many people are paying in relative to how many people are receiving benefits.
As of 2006 there were 3.3 workers paying in for every one collecting benefits. How will this ratio change as life expectancies increase and the boomers start retiring? Clearly it will go down. The social security administration themselves even admit that by the 2040s (when I become eligible) benefits paid out will only equal 74% of what is being collected by recipients now.
So when you say it can last forever, you don’t mean that it can pay out current benefits without further tax increases do you?
Jimi–The difference between SS and welfare is that we pay for our SS ourselves based on how much we earn over a working lifetime. Welfare has no work requirement. That’s the law. No exceptions. Now, you can believe that or not–it’s true no matter what you believe. As to whether it “will be there for you”, you have read everything BW and Coberly and Buff and VtC have to say. Now, three years ago, what kind of bet would you have made me that Goldman Sachs would turn out to be unethical stock manipulators, not to say crooks and criminals? Turns out they were stealing everyone blind and laughing all the way to the bank. Right?
So, you can’t trust them, pillars of capitalism that they are, can you? I would have earned a nice chunk of change because you’d have bet they were honest–unlike that horrible federal govt! Well, turns out the govt bailed ’em out with tax money. And if they hadn’t the world would have gone bust. So, maybe the government has the resources to do things like that. I think they can pay us SS if we don’t back down. How much you bet? Nancy Ortiz
this must be a different Jack.
The ratio will go down, and this does affect the amount of benefits that can be paid at a given tax rate.
plase not that if the benefits paid out will equal 74% of what is paid to recipients today, a tax (raise) of 1/0.74 will allow full benefitst to be paid. 1 / 0.74 = 1.35. So a tax of 1.35 times 6.2% will pay full benefits. This would be a tax of 8.4% or about 2% more than you are paying now.
Note further that this tax would not be needed until well after 2040, when incomes are expected to be about 30% higher than they are now. So if you are making a thousand dollars a week today and paying 62 dollars in Social Security tax, you would be making 1300 dollars in 2040 and paying 109 dollars in Social Security tax. NOte that your after tax income today is 938. Your after tax income then would be 1191. So you have more money to spend AND you will have paid for a longer retirement at a higher standard of living.
Note also, the real math is a little more complex, but the answer is close enough. The only part about this that worries me is that most people cannot compare a future tax to future income without subconsciously comparing the future tax to their present income. And most people are totally incapable of even imagining what their future needs will be.
But also, as Professor Rosser points out, with no tax raise whatsoever, future benefits… while they would be 74% of today’s as a percent of income, would have a purchasing power about 20% greater than todays, because the income would be higher. So there might be no need to raise the tax at all. I personally think it would be foolish of people not to raise their tax. They are going to want the higher benefit a lot more than they need the extra couple of bucks per week while they are working.
And some people today get benefits that are so low that increasing them to keep up with a rising standard of living is not only sensible, it is the only decent thing to do.
jimi
it’s not welfare if the people pay for it themselves.
and the only reason it wouldn’t be there for you is because the people you listen to want to kill it.
if you will notice, i do not predict the future. i just show the math. if the math doesn’t change the future can do just about whatever it damn pleases, social security will still be your best bet.
Hey Jack, pick another name. I’ve been Jack on this site for a long while now. Coberly has obviously mistaken you for me. See his remark below.
Dan, Is there no way to avoid this kind of confusion.
Jack, President of Jacobins United
Your doubling rates are off.
The correct method is to divide 72 by the rate. Not exact but close enough for any contingency.
3 percent will double in 24 years, 4 percent will double in 18 years. This will work up to 24 percent.
army fool
look again. i said “with constant input.” the rule of 72 only applies to a single, one time investment.
one of the hardest things about this business is people who think that you have made a mistake because they have made a mistake.
(Return = (1+Rate) ** Time) isn’t an approximation for compound interest, on money held for a fixed time. It is exact.
But now that you point it out, you are talking about a different equation that I’d have to look up which is that for constant accumulation with the interest accruing to you. I’ts not a terribly complex equation, but not one I’m likely to remember or take the trouble to dig out. And you really have to pair it with another similar equation for drawing down an annuity where you are still drawing interest on the remaining sum. In my experience, you are right, a spreadsheet is the right tool for this sort of stuff.
I’m not exactly sure what you meant by “doubling your money”. If you meant, having twice as much in your account as the sum of your inputs, then 40 years might be right (although it sounds high. That first 100 bucks has become $362). But it will last longer than it took to build it if you draw it down at $100 a month since you are still earning interest on the undistributed balance.
codger
trust me, i know how to count it down (annuity) too. like you i don’t remember the equations. i do it by spreadsheet. usually tells me more than the equations. i think Orszag uses the equations.
the problem here is that you don’t want to accept the problem i was “solving,” but want to solve a different one. that’s okay, but you should write your own story to go along with it.
oh hell.
the formula for compound interest is “exact’ only on your adding machine. try it in real life and funny things happen. like inflation, and different things being worth differnt amounts of money to YOU at different times.
So you agree then that current benefits cannot be sustained without higher taxes?
You can’t ignore the employer paid portion of the tax. It indirectly comes from workers paychecks like the direct tax.
Why do you say that current incomes are expected to be 30% higher? Is that just from inflation? Or are you talking about real wages? If you’re talking about inflation I think that SS adjusts somewhat for inflation, so you can ignore it when talking about benefits. If you were referring to real wages, how do you arrive at 30%? Real wages in the US peaked in the 70s. http://www.creditwritedowns.com/2008/06/chart-of-day-real-hourly-earnings.html
They have been down and up since, but I don’t know why we would expect them to rise given the global wage arbitrage and rate of productivity growth. If anything I would bet on further declines in real wages.
Well, you can live comfortable on less than $2000 a month. As cetainly could I if I didn’t have a family. I think that will be a real struggle for many. The cost of property taxes, insurance, utilities, house and car maintenance, gas, the 20% of medicare not covered by part B, prescription drugs, dental care, food, clothing, etc adds up pretty quickly. And there are far fewer places where one can live cheaply and comfortably than there used to be 50 years ago. I really think that most people should be saving an additional 10% over and above social security.
Really, if makes sense, For Social Security, you save 12% of income for 40-50 years, then expect to retire for maybe 15 years living on your savings. Even with compounding of return, that’s a lot to expect from 12% of income.
*** 1.) Do I really beleive it will be there for me and actually work in a reasonable fashion? NO!-I Don’t. You can run the math all you want, and predict the future to the best of your knowledge, but still not gonna believe it till I see it. Doesn’t mean I want to do anyway with it, just means I’m fine with it being a necessary evil. ***
Jimi. Perhaps you ought to try thinking rather than going with your gut. Read Bruce Webb’s material on Social Security. Make the effort to understand it.
There are really only two threats to Social Security. One is incompetent/duplicitious right wing politicians who don’t understand it and/or hope to loot it.
The other would be a dramatic and sustained decrease in the workforce to much lower levels than are expected after the boomers retire. But let me assure you that if the unemployment rate in the US rises to 20-30% and stays there that a 25% decrease in Social Security benefits isn’t going to even make the top ten on your list of problems.
Jack the second,
It’s real wages and it comes from the same place the “74% of benefits” comes from: the Trustees Report.
As I said, current benefits as purchasing power can be sustained with NO tax increases. If you want to keep the same replacement rate (% of average lifetime real monthly income) a tax raise of twenty cents per week per year will keep up with increasing life expectancy… levelling off at about 2% total increase. That is indeed the workers share. IF you think you can get the boss to give you his share, well that a whle nother post. Short form: if you have a skill he really really need, or you are self employed, you are likely right. Otherwise you are living in fantasy land.
Here is a test: raise the tax 2% combined. you will see the employees wages reduced by 1%, and the employers costs increased by 1%. Or you could cut the tax 2% and see how many employers rush out to raise their workers pay.
you are getting into complexities and imponderables. in fact into “the land beside”. considering the topic of this post i may get away with saying that the land beside is where the devil likes you to be.
it’s the land beside reality. the land of might have been. the land of should have been.
but mostly i just try to talk about arithmetic.
btw
as you point out that first 100 bucks becomes over 300 bucks. but if you need to buy milk for the kids or really want to go on that skiing trip, the hundred bucks today might be worth the 300 bucks tomorrow. that was part of my point.
on the other hand 300 bucks tomorrow, as compared to “nothing.” might be worth a million bucks.
codger
no reason not to save that extra 10%. in fact i think you’d be wise to. the point i am making is that it’s not wise to take 2% out of Social Security so you can save it at higher interest and run the risk of not having ENOUGH when you retire for the minimum necessities.
hopefully your family will be grown by the time you retire. i am losing hope about mine.
Just for reference if you are using excel the fV function takes a rate, a payment a number of periods and returns the value. So using this assuming a level payment you can find out what a stream of periodic payments will be worth assuming a growth rate. To annutize you can then use the PMT function (although it talks about a loan an annuity can be viewed as you loaning the money to an insurance co, and getting it back) If you want to include mortatlity in that go to immediateannuities.com and input an age, a gender a state and a principal amount and you will get a monthly income.
So compared to the pre computer days where you would have had to go to the handbook of chemistry and physics or one of its mathematical children for these formulas it is much easier now.
Jimi,
You’re 3/4 of the way there. You’re fear of the program not being there for you in the future can only be borne out if we choose Congressional representatives, both House and Senate, who care more about the welfare of the very rich than they do about us. I don’t get tired of repeating to as many that will listen that it is up to us to let the candidates know that our votes are for sale, but can only be paid for by their taking the people’s side of the Social Security issue. Of course there are other important issues to be concerned about, but this is one of the majors. “You don’t speak up for the sanctity of the SS program, I don’t speak up for you.” It really is the only weapon we have, but we each can multiply the volume of what we say by convincing our friends and neighbors to take a similar stand. The politicians may have forgotten, but that is what democracy is all about. It’s not the government that is the enemy. It is poor representation in that government that lets us down.
lyle
well and good. especially for people who know what they are doing and don’t have time. for me setting it up on the spread sheet forces me to think about what is really going on.
i made a whole career out of counting on my fingers. and telling the formula boys they were wrong.
I will plead guilty of being a near rocket scientist (geophysics) which included as a part of grad school the equivalent of an undergrad major in math. If people want to do it the old fashioned way thats well and good, I will admit to having done things the brute force/old fashioned way with spreadsheets every so often.
One interesting question is outside of MBA’s and types with some business training how many understand any of this stuff? So many are financially illiterate.
If I invest that 2 percent in an IRA at historical rates I can retire 3-4 years earlier than I could otherwise. SS provides the security that allows me to take advantage of that opportunity. If I manage to keep working until I am ready to retire (in my late 50s), I will be one of those who gets out what I put in and not much more. If I get laid off between then and now, I may end up needing to claim some of that insurance aspect of SS.
I believe it makes sense to have SS benefits keep up with the general increase in the economy (which requires tax increases), but I can accept a compromise that includes some benefit cuts along with tax increases in order to prevent SS from being gutted. As you note (with a nod to Professor Rosser) benefits will increase in buying power even without a tax increase.
The conservative complaint about social security is that it is not a fund, but a state-expanding tax. Nothing was paid into it, and it funds an intrusive and abusive government. This is a structural complaint, not a outcome complaint. The solution is to convert to an insured savings program, and to change from income tax to balance sheet tax. This would eliminate benefits at a specified multiple of the mean. It would unfund government bureaucracy. It would insert more money into the economy as investment capital, and decrease the negative effect of inflating the monetary supply on savers.
My favorite comment above is the 2% increase recommended. To which I’d state, only if that 2% comes from balance sheet weight, not income. Because for a vast number of companies that are not subsidized by the financial markets, 2% would be half of their annual profits.
Arne
what do you mean by “historical rates”?
i suspect the opportunity for you would not be an opportunity for someone making a lot less money.
why is it you can’t find that “2%” among the money you don’t pay into social security? have you checked under the cusions on the couch?
note that I don’t exactly agree with Professor Rosser. I don’t trust the inflation index, and it is hard for me to know why this year should be the accepted as the base year for standard of living. why don’t we use 1936 when most people didn’t have cars or refrigerators. After all, no reason why Social Security should enable them to live like “we” do.
lyle
i would argue that the mba’s and financial types are, if not illiterate, innumerate. sure they can add and subtract, but they very often don’t know what they are adding or why. they have this formula, see…
if i were an “expert” i might use the formulas too. but by counting on my fingers i get up close and personal with what i am counting. helps me to see the trees for the forest.
curt
it’s 2% of wages, and “most economists agree” it’s the employee’s money. in other words it’s what you have to pay them anyway.
now it turns out that was only true when they wanted the employees to think that returns on SS were half what they appeared to be. now that it suits the, it’s “really” a jobs kiling tax.
if you look at the same trustees report that everybody else points at and says the sky is falling, you will realize that wages are going up, profits are going up even faster, and the amount of GDP that goes to feed the elderly will go up from about 4% to about 5%. This does not look to me like an intolerable burden to feed ourselves after we quit work with the money we saved while we were at work.
now, i don’t see how any of this “expands the state.” it’s just a safe way for people to save their own money for their own needs.
“nothing was paid into it” seems to be a completely wrong statement that conflicts with the rest of your thesis.
nor does it fund government in any way. if the government did not borrow from SS it would borrow from someone else, or just “deficit spend” and live off inflation.
the government is intrusive. that’s how it works. you have the ability to control how and how much the government intrudes. it’s called democracy.
social security IS an insured savings program. no one pays on income over 100k, nor do they collect benefits on tax they do not pay. the benefit structure is such that it tends to shift income from high earners to low earners… not as a transfer tax, but as a consequence of “insurance.” the amount of the shift is not large, and should be about what you would expect to pay for insurance in case over a lifetime your luck turned bad and you ended up one of the low earners.
the goverment bureaucracy that manages SS amounts to less than 1% of the cost of SS. and SS pays for that out of the premiums it collects from the workers.
SS inserts the money it collects directly into the economy in the form of benefits paid to people who otherwise would not have enough money to buy things from the economy.
there is no shortage of investment capital. on the contrary there is too much money sloshing around the sytem looking for something to invest in, and ending up in gambling shcemes that tank the economy. Moreover, if you consider that at some point people take money OUT of their investments, you would see that Social Security takes no more money away from investments than investors would themselves. consider, if you buy a stock you are giving money to the man who sold it. he may(ultimately WILL) use that money to buy groceries during his retirement. forty years later you will sell the stock to someone who will give you money… that you will use to buy groceries during your retirement. since this is going on all the time, it is NO DIFFERENT than Social Security taking the money directly fom you and giving it to an old person now (who paid in his turn) and then giving you “back” your money 40 years from now, “taken” from some young person who sees the point of the arrangement. any “increase” from investment would be exactly the same as the earnings from the money we collectively do not put into social security but “invest” AND DO NOT DRAW OUT to pay for our later living expenses. this may not be explained too clearly here, but sit down and think it through and you may get my point. but even if you don’t agree with it, you still have the problem that this is not 1835 and there are no factories or railroads being built in a country where “savings” are very hard to come by. we have the opposite problem.
SS has no effect on inflation whatsoever.
i think your comment is not informed by much actual knowledge […]
and you should note that the taxes they pay in are “wage indexed.”
arne
it’s a lot better than that. 12% for 35 years will buy you an annuity that pays 40% of your lifetime average real monthly income every month for the rest of your life, even if you live another hundred years.
of course when everyone starts living … say … twenty years on average… then the 12% will need to go up to 16%, of which half is extracted from the boss at the point of the government’s gun. is you are your own boss… well, i guess the crime of being forced to save one sixth of your income for 40 years in order to guarantee a pension of one third of your income, adjusted for inflatiion and the general rise in living standards, for 20 years or more, is just the kind of crippling burden we can expect from an intrusive government.
Actually, since I have made right about the FICA limit most of my career, I can expect to get back 26 (maybe 28) percent of my average real monthly income. Enough to easily pay for my essentials, and good insurance, but the fact is that for people like me (as long as I stay employed) putting 2 percent (or 10 or 15 percent) into a Roth IRA or a 401K makes more sense than putting it into SS.
There are two reasons I still support increasing FICA anyway. One, there is no guarantee I won’t be laid off next week – I do need insurance. Two, I am better off if the people around me have a stronger safety net. I will give up my pretensions about being able to invest MY 2 percent better by myself in order to increase that safety net. Nonetheless, if it takes a compromise to keep SS from being gutted, I have thought about the limits I think are reasonable.
Whatever is done, people need to understand that continuous adjustments are going to be necessary to pay for the fact that it costs more to pay for benefits for people who keep living longer.
i can agree with that.
you also point to a reason i don’t want to see a raise in the cap. you are already feeling abused by SS, people making more than you would get less return than they could justify as insurance.
what i say is what Bruce says, we can afford to wait before doing anything drastic. a tenth of a percent raise in the tax from time to time is not drastic. we could always reverse the raise if it begins to look unfair. but do keep thinking about that lady i met pumping gas because her $400 Social Security check wasn’t enough. There is something to be said for counting your blessings as well as your potential return on investment.
Is this related to the Black Jacobin revolt in Haiti?
Jack,
Arithmetic don’t work in political economy.
The Hun is telling the Greek to get its pension system under control because they are the new over lord of Europe.
This is because the Hun recognizes that the Greek may not cash the Greek version of SS special tresuries.
This is the Greek government’s fault not the folk who contributed the Euro cash to buy the Greek SS special treasuries.
I do not suggest that the Hun go after the Greek.
That might give rise to guys like Lenin to handle justice on the guilty.
ilsm
i think he is talking about the Jacobins of the French Revolution who kind of led the off with their heads movement. But I don’t know about the Black Jacobins, so you should tell us about them.
ilsm
you are a bit late to this thread. i think they have all gone home. but i’d like to see a good discussion of the Greek pensions deal. I haven’t so far. Except a reference on the high end news sources to the “over generous” Greek retirement system. For all I know it may be over generous. But I don’t know, and it sounds to me like more of the world wide assault against letting working people pay for their own retirements. Because they are so much more valuable working. or “investing.”
I don’t feel abused. I am just in a position to see a different tradeoff.
I tradeoff how much life insurance I choose to purchase based on my personal financial situation. When I tradeoff how much I put into my 401K and my Roth IRA, I consider how much I expect to get from SS. I don’t actually tradeoff how mch I put into SS, but this conversation lets me consider such a tradeoff.
If I do the kind of analysis I see some people do, I conclude that SS turns out better than a low risk investment for people up to about the median. Pretty good results for an insurance policy. But it is only good up to the extent that it is insurance. As a way of saving for a very comfortable retirement, it is not so good – you need more, and you can get more.
Note that the kind of analysis I refer to is badly flawed because (for at least one reason) it ignores that if their parents don’t have SS, then they may need to support their parent as well. Such an analysis can be instructive if you understand its limitations, though.
So the question is, what is the right amount of retirement insurance and how do we make sure the politicians (who tend to ignore the flaws of the analyses thrown at them) do not negotiate it away.