Fix the economy - Step #1b more retirement

OK, so I've asked our older populace to take a hit and accept a later start to SS. What about the younger populace?

Well, I think the first big thing to recognize is that we're looking to live even longer than our parents. (I'm 30) So if 65 is too young for our parents to retire, then it's going to be way too young for us to retire. Fortunately, I know lots of people my age who seem to inherently understand this conundrum.

But understanding doesn't necessarily solve the problem. Lots of people my age are also graduating with record student debts and have spent a decade being priced out of homes. Retirement savings are not just low with 60-somethings, it's low with 20-somethings.

There have already been proposed plans for "mandatory retirement accounts" to be offered by employers and I think this is a step in the right direction. However, I think it's "too little" in a couple of directions.

Mandatory Retirement Accounts - Improvement One

First off, the proposed plan creates forced IRA accounts to be set up by employers. These are not the people you want managing this process. Employers are already over-burdened with major benefits like healthcare, dental, disability, etc. On top of that, the average worker will cycle through multiple employers in their lifetime, especially with my generation. If each employer is setting up a new IRA with their provider of choice, you create a giant paperwork mess.

In fact, it's already a paperwork mess. I still haven't rolled over my 401k from 2 jobs ago and pulled it in with the current one. It's all just a pain, shouldn't I just own the 401k and let the employers plug in to my provider of choice? Why does my employer choose my 401k provider?

So this needs to go the other way.

Each person needs to "own" their 401k and government-mandated transfers should happen directly to those portfolios. If the employee doesn't have an IRA, then those dollars are thrown into a government account in their name/SSN to be invested in government notes.

In the electronic era, this whole process is relatively simple.

Mandatory Retirement Accounts - Improvement Two

The second fix here is really to fix the whole [Roth] IRA / 401k / Defined Benefit mess. Why do we have these all of these confusing options? Why do we have the choice between Roth or non-Roth? Do we really want people guess between "tax now" and "tax later"? Does it make anything better?

I think the US needs to look towards a system like the Canadian RRSP for retirement savings. The RRSP system is simple to set up and simple to envision / manage.

The basic premise is that you have two investment "buckets", one bucket registered for retirements and the other bucket for "regular" investments. Money going in to the retirement bucket goes in un-taxed and gets taxed on the way out. To avoid people from "churning" money, the RRSP bucket has a growing lifetime max based on your income. To avoid tax cheaters, withdrawals have some %  held back.

And yes, we should have the usual "out of work" or "back to school" allowances for withdrawals.

In either case, the tax retirement mess should not require a book to explain. It all be explainable in a 5-minute video. In fact, the government should actually produce this 5-minute video :)

Isn't this all Socialist?

Did I mention I'm from Canada? It depends on your take here. Isn't Social Security socialist?

Yes, my whole proposal is "government meddling".

But there's a clear trade-off here. People are notoriously bad at thinking for the long-term and saving for a rainy day. We currently have a entire generation of voters who don't have anywhere near enough money for retirement, so we have living proof of our capacities here.

The goal of my proposal is to set small measures now to prevent larger problems later. If you don't think this is a good thing, then it's easy to call this socialist. But that same measure could apply to lots of existing programs that help provide stability.

I firmly believe that what the public seeks from government programs is some basic form of stability. This program is the type of program that actively promotes that stability, which is why I think it's important.

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)?

Is inflation the answer?

The Curious Capitalist explores the Fed's options, including having the Fed raise "target inflation" from 2% to 4% or even 6%.

So pushing up "target inflation" rates may seem like a good idea, but there are definitely a few hazards here.

Hazard #1: Seniors

Pushing up inflation means raiding those who have cash. The goal is to raid the coffers of big companies just enough to push them into spending that cash. You're basically trying to "scare" people into spending to produce.

The side effect here is that inflation affects all cash.

Targeting 5% inflation hurts people planning to retire soon (i.e.: baby boomers), but it also really hurts those who are already retired. These people already live off of cash and they've stopped producing. They have way to counter the effects of such growth, they cannot grow their income.

It also sucks for the unemployed who were already falling behind.

Hazard #2: Anger investors

Investors are not stupid, they can calculate the effect of inflation. The 10-year treasuries are currently under 3%. Investors are honestly accepting that this is basically zero growth. You're not moving forward much, but at least you're not losing ground.

Changing the inflation plan to 5% means that 3% investment is effectively losing ground. What's more, everyone who bought these sub-3% bonds in the last 3 years is going to end their 10-year holding at a real loss.

China will not be happy about this move. Forcing inflation is raiding cash. This would be raiding China's coffers in a very real way.

Hazard #3: The gig is up

The long term plan has always been to inflate away some portion of the debt. Everyone is doing it, but there's definitely an aspect of "chicken" going on. No one wants to inflate too much.

Well jumping inflation to 4% or 6% on purpose pretty much ends the game. Then everybody knows the plan. Fiat currency is all about trust. Raiding the savings of hundreds of millions of people is not a great way to engender further trust.

Maybe I should buy gold... or bitcoins... or both :)

How much to make you happy?

UPDATE: the video is here. If you skip forward to 17:15 or so the announcer walks on to the stage and he brings up the 60k number. Of course, the whole video is probably worth watching.

So I'm really looking forward to this TED talk from Daniel Kahneman.

The choice quote from the link:

Psychologist and Nobel Laureate Daniel Kahneman says millions of dollars won't buy you happiness, but a job that pays $60,000 a year might help. Happiness levels increase up to the $60K mark, but "above that it's a flat line," he said.

"Money does not buy you experiential happiness but lack of money certainly buys you misery," he said. But the real trick, Kahneman said, is to spend time with people you like.

So why $60k? My initial suspicion (having not seen the presentation yet, it's not up), is that this has to do with some 80/20 math. In particular, that above $60k / year puts you into the top 20% of income earners which is probably all it takes to make most people happy. It's enough.

The numbers from Wikipedia.

http://en.wikipedia.org/wiki/Personal_income_in_the_United_States

A US job that pays $60k puts you almost exactly in the top 20% of US income earners. (assuming that you have a job and are over 25) In fact, it puts you in the top 40% of household incomes. So if you make $60k+ and your husband stays at home and watches the kids, you're still making more than the average family. And you probably have a University degree or better.

If you exclude some of the outlandish parts of the country (NY, LA), then $60k + health benefits provides you a very comfortable quality of life. And if you're like most earners in this category, there's a very good chance that your spouse also works which bumps you up even higher. If you make 60k and your spouse makes even $10 / hour (i.e.: 20k), that puts your family into the top 20% of US households.

So is that going to make you happy? Why don't we "imagine the life"?

You can probably afford to travel once / year, own a relatively new car, maintain a mortgage (at 2000 rates), kids a pet and a hobby or two (if you have time).

You go to a church with 100 families and you're in the top 20 for income. In fact, your top 20 group probably makes up 50 to 75% of the church funding b/c you have more disposable income. It sounds selfish, but living in such a peer group is very comfortable feeling.

Your kid is likely one of the richest 4 or 5 kids in their class. When the kids want to hang out, they want to hang out at your place b/c you have the good TV, the good games, the good snacks and the space. Your kid gets the coolest presents or at least nobody get toys that are significantly cooler. That tends to make a parent happy.

I know these are shallow definitions. But these things would probably make most people happy.

Is 90k better than 60k?

Again, I haven't seen the presentation, but I have some postulations as to why it isn't. Mathematically, the 90k is 50% "better", but it doesn't necessarily "give you more". Remember that at 60k, you're making more than 80% of the working population (let alone those out of work). At 90k you're making more than 85 or 90% of the population, but you've really only jumped a few "notches" in the "final rankings".

In most parts of the US you already have access to a very good and healthy life at 60k. You've pretty much covered everything commonly deemed as a necessity and you probably have some money left over for "entertainment". So the jump to 90k really just gives you a little more "entertainment" and maybe some bigger stuff, but that's it.

And if you're the type who's not happy with being in the top 20%, then how much further do you need to go? Top 10%? Top 5%?

Really, 60k for one job is far enough "ahead of the game" to keep happy those that can be kept happy. And that's probably why this is true.