Saturday, August 13, 2011

Fix the economy - Step #1: Retirement

So we know the US economy has major problems. High unemployment, likely structural, definitely hurting the youth. Aging infrastructure. Large debts + a large deficit. Very large unfunded liabilities like medicare and social security.

Oh yeah, and let's not forget that whole housing thing. The one where the banks are only solvent because they changed the accounting rules while they slowly liquidate their losses. It's clear that stuff needs to change, but where do we start?

Obviously, the Tea Party has made this whole "brouha" about a "balanced budget", but there's no clear plan to deal with any of the issues above. So it's time to start making some serious decisions. So this is the first of several steps I suggest for repairing the US economy.

Why trust me? Well you are reading my blog :) But frankly, I just live here. I can't vote, don't make campaign contributions and will probably leave in a few years (bad economy or no).

My only vested interest is that I don't like to see people suffer needlessly. Don't get me wrong, people are going to suffer as part of "fix the economy", I'm just trying to avoid the "needlessly" part.

Step #1: Retirement

Here's the deal, we cannot all retire at 65 if we plan to die at 85. We cannot have a population that spends 20+ years getting educated and 20 years "doing nothing" with only 40 years in between. 20 years of "nothing" is far too long for the average person, it's just too much "unproductivity".

It especially won't work with the upcoming Baby Boomer crisis. We can't have a giant chunk of people are retiring at once and we can't have them retiring for 20 years. The economy will suffer heavily from the productivity loss and the social security system will simply "run out" of money (i.e.: need to print money).

Of course, we may avoid the "rush of retirees" simply because many people near their sixties are nowhere close to retirement. We're talking about boomers with $50-110k to their name (including home equity). That either means stretching social security and praying for the best with inflation, or it means working longer.

For the country as a whole though, we don't have enough money to support Social Security at current levels. Especially when the big boat of baby boomers beat a path to the SS offices. So let's fix a couple of problems.

#1a: increase Social Security age

The US should definitely push this back to 67 or 68 ASAP. Several other countries have already done this, so it's not really ground-breaking.

Yep, this is going to be unpopular, but I think it's the least painful way to curtail the debt crisis.  It's also kind of fair. The people who are losing a few years of SS are also the same people who voted throughout the period leading up to the whole crisis. They were an entire generation born into and raised with the possibility of receiving SS. The current under-funding is the result of years and decades of poor fiscal planning, so at the least the planners are "reaping what they sow" here.

#1b:  consider "rolling down" SS

SS is a neat concept, but it's basically a pyramid scam. It's unlikely that my 20 & 30-something will ever see any SS payments come our way, the whole system is going to implode long before then. Most of my peers have already accepted that.

So maybe it's time to draw a line and start a new program for people under 40... but that's the next post :)

Any thoughts on changing retirement / SS age? Should it be higher (70)?


steve banicki said...

You and I will not have all of the ideas, but it is a start. As a society we need to start with a plan and then follow it. Here is a start.

MaynardDizzy said...

I think you have a lot going for you but I have to disagree with some thoughts.
Have you noticed no one says lets raise the percentage contribution to fix Social Security? Maybe 1/4% would go a long way lets look into it. Instead the fix is concentrated on lowereing its value. Either there is no one thinking or those that are have a agenda in mind to destroy SS. If they can peal off young people out of Social Security they can end it. If young people are told they will not benifit the money won't be there they will have to live to 80 to collect then they will support polticians who will be for just ending the proggram. I think its all part of the design.
Government borrowed and spend the SS funds as they should have I suppose SS can't keep funds lying in the valut they must be invested and so they were. But now we moan and groan about deficits, would it be great if we didn't have to pay it back?
Sure would and it also would be great if we didn't have to pay back Treasuries like all those 1.5 Trillion the Chinease own. We won't do that to the Chinease, that would be dishonest, be bad business practice and cause further problems. But we can do that to our own Senoirs?
All this 401K retirement stuff is good but please it can disappear in value over a week or twos time as we have seen pensions lose billions in value in 2008.
They are great to have but it's no sure thing it could be gone happened before and it will happen again.
I think maybe we should keep what we have in SS & Medicare and make them better even if we have to put up a percent or two more into it. We have in the US low personal tax rates compared to other countries. They charge more but offer more back, thats a good trade off.

Gaëtan Voyer-Perrault said...

So the social security + medicare deduction is about 10.4% of my income this year. Last year it was 12.4% of which I'm paying 4-6% off the payroll taxes.

So if I take round numbers and make 100k/year until I retire at 66, I'm paying about 5k / year for 40 years (26-66) and then I get ~2k / month out.

Let's avoid inflation math briefly and assume that we get 0% interest / year but that we also get 0% inflation. At the end of 40 years I have put away $200k If I live for 100 months, I will spend that 200k. So if I make it to 75, I've already spent my investment. And 75 may be the new 60 by the time I get there.

So what if you add interest? Well, US inflation rates have averaged 3% over the last 10 years. GDP growth rate for the US has been between -2% and 4.5% over the last decade. Government treasury bonds are basically at 0 relative to inflation. So "guaranteed" interest right now is basically paying 0.

Why GDP? Well, if you want to grow a really big pile of money like SS with zero risk, you basically have to invest in government bonds or some instrument that will move roughly at the GDP rate. But that's a big problem if the money is growing at 0% or even 1% / year, it really isn't enough.

What's more, 2k/month is almost nothing for someone who was making 100k / year. They were taking home 60k + health benefits, so 24k/year doesn't supplement the income. Now the person with 100k income will probably have savings to "top that up", but what about the person who live on a 35k income (national average)? They get $1050 / month and they do not have that same savings buffer.

And then there's the rise in pay over a lifetime. A typical employee will go through several pay raises in the first several years. So in the early years, when interest growth is most important, the tax payer is paying less than the amount they expect to claim at the end.

So from a basic numbers standpoint, the whole thing is a little sketchy. The primary way to "make the numbers", is to have more people paying into the system then pulling out... lots more.

But people are living longer and birth rates are slowing. So we're going to have less people supporting the system and more people withdrawing. So that won't work. In 1990 worker:retiree was 5:1. In 2035 (long before I retire), that number will be 3:1 (or less).

If you push back retirement age, you get a 2 for 1. Each extra year is one more year of people paying in and one less year of people withdrawing. And they've started this movement already, but it people are living to 85 or 90, even 66 is too young. And then you have to convince aging voters that they have to wait another 2 more years for their benefits.

The other way to make the numbers work is to increase tax / drop payments (as you suggest). As it stands, SS will not meet expenses for the average American, so dropping payments is not only unreasonable, but wildly un-popular.

So we're left with increasing taxes. We could try small increase, but that's only going to have a small impact. With our current unemployment around 16%, a small drop in the unemployment rate is more useful than a 0.25% increase.

A 1% or 2% increase would definitely buy some time, but it also means new taxes. Again, 50%+ of the populace voted for a Republican congress that opposes new taxes. So the cycle continues.

There's no easy fix here. Fixing the system requires that someone suffer somewhere. Somebody has to accept significantly less or give significantly more and right now nobody wants to move. And as more people retirement and need those benefits, the odds of changing them gets even lower. So right now, we're just leaving the big bill to the kids born today.

MaynardDizzy said...

As times get tougher and many more join the lowere economic strta there will be more and more who have no retirement savings.Really what could they possibly save? And that has long been with us there are many on SS today who have nothing else.A recession/ depression like we are in will only exascerbate that problem. Everything will cost so much more in the future I remember being 18-20 years old and a new cheap bottom line American car could be had for less than $2000 and imports could be had cheaper. Apartments could be had for somewhere in the neibor hood of $100 a month or so not in major meto areas but around the Nation.
Don't know what will happen but I can't see it being pleasent.

Gaëtan Voyer-Perrault said...

... there are many on SS today who have nothing else...

This is why I propose "rolling down" Social Security.

On one side, it's not enough to live on (especially the disability), on the other side it provides a false sense of security for people planning to retire.

It is only intended to be "supplemental", but that means that it's really just a half-measure.