Thursday, May 02, 2013

Saving for retirement: freedom & return vs. statism & poverty

Writing in Slate, Matt Yglesias says "401ks suck."  The Instapundit responds:
Instead [Yglesias] calls for “a much more forceful, much more statist approach to forced savings, whether that’s quasi-savings in the form of higher taxes and more Social Security benefits or something like a Singapore-style system where ‘private’ savings are pooled into a state-run investment fund.”
The problem is, those approaches suck, too. Social Security is going broke. If you want to see a pooled state-run investment fund, look at CalPers. It’s going broke amid horribly politicized mismanagement. And state-run pension funds are subject to all sorts of politicized investment decisions that have nothing to do with the interests of the pensioners.
There are two issues here.  One is the eternal impulse of the good-intentioned Left to take a little bit of your freedom because, gosh darn it, you're just not smart enough to handle your own money.  Yglesias doesn't propose that we launch a massive education initiative to show Americans that they need to save much more for retirement - more than they think.  Instead, the sheep need to accept higher taxes so that the government can supplement their meager savings.

The corollary to that is money not going to the government is going to investment firms and that is simply intolerable.  So Yglesias conjures up Uncle Moneybags taking a fat cut.  To this assertion, he has something of a point.  But ultimately the name of the game is your rate of return on your investment.

Let's say you are a young worker and your 401(k) earns a modest 5% after fees.  You earn $50K/year and invest the same percentage in your plan taken out in Social Security (6.2%).  Not counting any company match, after 20 years you would have a little over $100,000.  Since Social Security now has a negative rate of return - we'll round that off to zero for this exercise - the same $3100/year "invested" would yield $62,000 after 20 years.  That's a 40K difference and you still have 25 years to work and compound - or not.

Social Security was never supposed to be more than one leg of the "three-legged stool" for retirement.  If you spend all your retirement cash trying to win an XBox and all you have is a Rastafarian banana, the government isn't compelled to bail you out.  You should have known better.

Extra - Reason's Hit & Run: "Neoliberalism 3.0: More forceful, much more statist approach to forced savings."

Footnote - I failed to mention that the Social Security Trust Fund runs dry in 2033 and then, by current law, benefits will be cut by about 25%.  This makes a bad investment worser.  You heard me.


Ida May Fuller said...

Where's the legal, ethical or fiscal difference between:

*Siphoning money out of Social Security's fund for three decades, then declaring that the remainder is, shockingly, on course to "run dry";

*Failing to pay a mandated employer's/state's share into a pension fund, then noting with alarm that it's "underfunded" and pensioners now need to accept the hard reality;

*Hypothetical: unilaterally reneging on the obligation to pay matching amounts into a 401(k), or even taking back previous payments.

It'd be immoral and sad, but hey, that's hard reality.

In equally shocking news, when I go into your house and steal every piece of food, your breakfast tomorrow is going to be disappointing. Does that mean breakfast is a Ponzi scheme?

Ida May Fuller said...

Also, just as Social Security was never supposed to be more than one leg of the stool, neither was it supposed to be an unbeatable investor profit payoff.

We were all born into a communal society; oh, the horror.

Eric said...

Dude/Ida: I'm only a little bit drunk (it's Thursday) but what are you getting at? I'm lost.

Pay the pension fund, already. Just stop bitching if there's no money for anything else. The difference is that my 401k doesn't affect the fire department.

"Unbeatable investor profit payoff" - what the hell are you talking about?

Sweet mercy.

Ida May Fuller said...

The difference is that my 401k doesn't affect the fire department.

And Social Security is unrelated to the national debt. That hasn't stopped the noise.

"Unbeatable investor profit payoff" - what the hell are you talking about?

Social Security's investor profit payoff has been beaten, on many occasions, with other higher-risk investments. So what? Social Security delivers a floor, not a ceiling. It's not a "get rich quick" plan; it's not even a "get rich slow" plan. Directly contrasting SS to stock and bond-type investments which can win bigger or lose bigger is an irrelevancy. The taxes that an individual pays in aren't earmarked for that person. Much to some people's chagrin, our nation's pluribus doesn't come with an opt-out for disgruntled unums.

Last year, Social Security actuaries tackled the "negative rate of return" concern. They considered Americans' estimated fiscal fates based on five levels of wages, 85 different years of birth, and marriage status, with the above range of scenarios also applied to spouses. They then considered that payroll taxes might be increased in 2035 to account for any shortfall, and also that future benefits might be reduced. They ended up calculating 891 combinations.

In none of them does the hypothetical worker get a rate of return lower than the projected rate of inflation. Estimated real rates of return for the 891 payees range from 0.04% to 9.19%.

For medium wage earners who are currently 63 years old or younger, the range is between 2.13% and 4.66%. The vast majority of workers have an estimated real, risk-free rate per year of 2%-4%. The worst result is for a single male born in 1964 and earning at the highest wage level. (Naturally the REAL worst result will be for someone who dies before becoming eligible.)

At the edges, Social Security can turn into a great payout or a great loss. For the bulk of citizens, it's still effective at doing what it's supposed to do.

Eric said...

"And Social Security is unrelated to the national debt."

That used to be true. In fact, the SS surplus used to mask the true size of the deficit. But starting last year, the bonds are being redeemed out of general fund. This year it will account for $75 billion and it only goes up from here.

I read through the SS spreadsheets and a couple things: two of the scenarios assume either higher payroll taxes or scaled-back benefits. Given the screaming over reducing COLA increases by $4/month with chained CPI, there's no way any of these major changes will happen. That leaves current policy which leaves middle earners squarely in the 2% range.

But then you're correct in that Social Security is not an investment fund but a kind of social insurance - a floor. But Yglesias wants to raise the floor on the belief that because Americans are too dependent on SS, we should make them more dependent on it.

Ida May Fuller said...

To get really technical, they haven't started redeeming bonds out of the general Social Security fund. As of last year, they're taking some of the interest on SS's existing stock of treasury bonds in cash, rather than as additional treasury bonds. They won't have to redeem bonds for a few years yet.

These interest cash payments do affect the debt, but only because of other fiscal choices that have been made, and not made, by Congress. If Social Security money had been invested in corporate bonds all along, rather than U.S. bonds, the structure of Social Security would remain unchanged - but the government would have had to have found another source to replace the trillions in SS money it's been enjoying. New, sensible choices by Congress could easily reverse this new interest/debt development (yeah, right!).

Eric said...

I'll say one thing, Ida: you know your stuff.

Anonymous said...

Well, I'd say Ida knows her side of the stuff--that is, the side she wants to know.

Anonymous said...

Yeah, in between the one-sided actuarial study and the one-sided explanation of Social Security's interest earnings, where are Ida's links to the serious analysis of Breitbart or Weasel Zippers?