Three-quarters of our fellow Americans have just told a poll they think everyone should have a “defined benefit” (or “final salary”) retirement plan.
Phooey.
Talk is cheap.
How many of them are actually willing to fight for the final pay retirement plan that we already have?
I’m talking about social security. And the answer is, probably not much, based on how everyone talks, acts, and votes.
About 242 million American workers and retirees are now dependent on Social Security or will do so in the future. But as regular readers know, the program is now $ 16.8 trillion in the hole. Without a drastic fix, it will have to cut benefits across the board by about 20% in about a decade.
Still, you would hardly know about the last countless American elections.
When we get to the point where Social Security actually needs to be lowered, it will be interesting to go back to the main headlines of the last five or six US presidential elections.
To put the Social Security funding gap in context, there are 154 million households that pay taxes in this country, according to the IRS. So filling the Social Security deficit would mean a one-year increase from an average of … $ 110,000 per household.
In the words of Alec Baldwin in Glengarry Glen Ross, “Oh, do I have your attention now?”
(Maybe when it comes to Social Security, we all need a coffee moment.)
President Biden’s proposals include imposing an additional 12.4% tax on those who earn more than $ 400,000. (That, by the way, would raise the effective top marginal federal income tax rate to nearly 50%.) He also wants to expand benefits for those at the bottom of the scale.
As MarketWatch’s own Alicia Munnell says, in an interview with Think Advisor, the tax increases aren’t enough and the added benefits widen the gap, not narrow it. Wharton says this plan would close less than half of the funding gap in the long run.
As a nation, we’ve accumulated an additional $ 17 + trillion in government debt since 2000, paying for wars, rescue packages, tax cuts, and boondoggles (pick your order). So at a time when we need to get our hands on $ 17 trillion for the nation’s premier retirement fund, we find we have managed to borrow $ 17 trillion … and spend it on everything else from the nation’s major retirement fund. the country.
Good job.
How ironic that 21 years ago, when the federal budget was in balance, President Clinton said the first budget priority should be “save Social Security first.” If it only were.
Meanwhile, a workable plan to square the circle by investing social security funds in stocks like any other pension fund is not even on the agenda.
Why not? I hate to sound cynical, but: a lot of the people who make the rules don’t really trust Social Security itself. So are they really going to sweat bullets to find ways to save it?
In 2005, then President George W. Bush came up with a half-baked, or possibly quarter-hour, plan to “privatize” Social Security. Most of his plan was unworkable or worse. But buried in it was one healthy principle: that some (or even all) of our Social Security money should be invested in stocks.
There was, and is, no reason why the trust fund should not be empowered by law to do so.
But this idea is so outside the “Overton window” of acceptable solutions that people won’t even talk about it.
If it is so crazy, why do all other pension funds invest in stocks?
If it’s impossible, how can even Norwegians do with their massive state pension fund?
Based on some basic math – and with a hint to Michael Kitces of Buckingham Wealth Partners, although I’ve updated the numbers – we can calculate that Social Security today has a capital value of about $ 320,000 for the average man who is 67 years old. age is retiring. and $ 380,000 for the average woman.
That’s how much you would have to pay to buy an equivalent inflation-adjusted lifetime annuity from a private insurer.
So a 20% discount would make the average man $ 64,000 poorer and the average woman $ 76,000.
Meanwhile, the new research shows that 77% of people support “pensions for all” to be less than it appears. It is published by the National Institute for Retirement Research, a perfectly reputable think tank. But its original creators included the National Association of State Retirement Administrators and the National Council on Teacher Retirement. And the survey appears as part of a document claiming there is wide public support for national and local retirement plans.
In an earlier version of this column, the net worth of the household was misrepresented. It has been corrected