First, the problem:
Let me be alarmist for a moment, because the fact is the numbers are truly alarming. We should be worried that large numbers of people nearing retirement will be unable to keep their homes or continue to pay their rent.So obviously the solution is that government must give these people enough money that this does not happen. However:
There are good proposals out there for improving the private aspect of our retirement system.... [b]ut none of these ideas will help people who are nearing retirement. Only the possibility of several decades of compound returns make the personal financing of retirement a realistic idea for most people....So, we have a huge government benefit, Social Security, that -- in spite of being one of the largest expenditures of the United States already -- isn't capable of meeting the minimum standard that Dr. Black would set for it (i.e., no one loses their home). The solution is to increase spending by 20%. However, no one can pay for this spending! The about-to-retire can't do it because they already don't have enough money. The not-quite-about-to-retire need to be saving like bandits to avoid being in this trap themselves. And the young can't do it because the cost of a college education is through the roof, and so they are starting their lives in a hole. They'll have to work twice as hard to get out of the hole, and then have to save for this burden we call retirement.
Even if we do find ways to improve the framework for self-funding retirement, how, exactly, do we expect younger workers, who might benefit from these improvements, to start saving significantly for their retirement? Soaring tuition and fees at universities, combined with the associated soaring student loan borrowing, have led many people to start their working lives already deeply in debt.
Now, Social Security is a kind of generational insurance program (or, if you like, Ponzi scheme). The idea is that the current retirees draw benefits paid for by younger generations, in return for the promise (or, if you like, forlorn hope) that similar benefits will be paid to them in their turn.
We have just learned that this program fails the current generation about to retire, but increases cannot be supported by the next generation in line, nor the younger generation either.
I would take this as an argument that Social Security has failed, and needs to be replaced. Dr. Black takes it for an argument for its expansion.
This is why our system is dying. Black isn't a bad guy. He has charitable interests at heart. He's very well educated, and even in the subject matter under discussion. Joseph Schumpeter was exactly right about him.
(A further critique is here.)
We can't take Social Security in isolation. There are interactions.
ReplyDeleteIMNSHO, we need to privatize social security, and make each individual's contributions to a retirement plan his own, not a transfer payment to someone else's parents. (There's a hint there, too, about government-run welfare being anti-family, but maybe that's another thread.) A way to fund this would be to make (even though I dislike government mandates) each individual set aside his current 4.2% of his paycheck that goes to SSN and put it in his own retirement account--402(k), IRA, whatever--which account should have no upper bounds on income eligibility or contribution amounts.
But as the man points out, this does nothing for the about-to-retires or the already retired. How to fund them, for whom it's too late to adjust to a major change in the system?
Eliminate business taxes altogether, including payroll taxes, along with all deductions, credits, subsidies, etc. Reform the personal income tax code to a flat 10% that everyone pays--again with no deductions, credits, subsidies. Based on 2007 numbers, that would produce a bit over $600 billion more tax revenue for the government--which should go to funding the shortfall for the about-to-retires and the already retired.
The bet is on another interaction. The $600B likely won't be enough by itself, but the increase in economic activity from the population having more of their own money left in their pocket, skin in the game for their own future, and the drop in price level (perhaps small), all will combine to produce a spike in overall income that will fill the remaining gap. To be sure, the spike will be temporary, but it'll likely last 10-20, years before a new, higher activity equilibrium is reached, thus covering the shortfall--which really will last only about a generation, after which the system will be switched over.
One more interaction: budgeting/finance/economics need to become a fourth R in K-12 education.
There are political bets in this, too, but these are the main economic bets.
Eric Hines
Black's problem seems to center on his inability to understand the full implications of personal responsibility as a dual of personal liberty, and of the importance of risk to each.
ReplyDeleteThis leads to his opening premise--Recent and near-retirees, the first major cohort of the 401(k) era, do not have nearly enough in retirement savings to even come close to maintaining their current lifestyles--being, at best, suspect.
This is, narrowly, true on the whole, but it's the structure of the system--and those interactions--that contribute causally (though not as the sole cause) to any shortfall. There are income and contribution limits applied by the system that make it difficult to save enough in a non-governmental retirement plan.
There is the existence of an entitlement program--social security--that lowers the perceived need to save one's own money. The freebie will come.
There is the inability to save for medical problems (real ones, not the sniffles, or ...) because a) Medicaid and Medicare will take care of everything (and now, so will Obamacare), and b) the ability to save into something like an HSA is constrained by artificial contribution, income, and eligibility limits.
Take off the limits, and they become more viable. In fact, they're viable now, as a single anecdote will demonstrate. I'm no great shakes at money handling, and I'm of average intelligence. Yet through discipline and not limiting myself to social security (that's FOB money in my planning) or to 401(k)s, IRAs, and the like--I use those, but I use taxable "retirement" accounts, also--my wife and I have enough on which to retire now. But we won't retire now, even so. There's a caution about the future and that whole work ethic thing.
If I can do it, so can most anybody.
Eric Hines
Hines for Treasury Secretary
ReplyDeleteI'll vote for him!
ReplyDeleteHe has charitable interests at heart.
ReplyDeleteNo, he has larcenous interests at heart, he just clothes them in the facade of charity. He's talking about taking money from those who have saved to give to others. He's NOT talking about giving his own money to others. That makes him a thief. Charity never involves forcing others to give their money. That's banditry. Now, if he was talking about setting up some form of exchange where citizens can contribute voluntarily to a general "retirement fund" of their own free will, then I could call that more philanthropic. Still not charitable, perhaps, until he kicks in to it, but philanthropic.
Well, he's charitable in the same way as Robin Hood.
ReplyDelete[H]e has larcenous interests at heart, he just clothes them in the facade of charity.
ReplyDeleteThis is hard to support, as someone pointed out in a different venue. It's entirely possible he really believes this is the right way to go without a complete understanding (or a different one than ours) of the full set of implications of his position.
Certainly among those implications is one pointed out in OP: who will pay for the 20% bump. That sort of thing is, to me, the magical (but not of necessity larcenous) thinking of the Progressive: money will appear. If nothing else, we can print some.
Another unconsidered implication is a proximate source of the present system's failure: demographics: retirees are living three times as long or longer in retirement than when the system was cobbled together (where's an ice floe when we need one? Oh, wait--global warming...), and there are less than half as many workers...paying...into the system today than then--and that number is falling (didn't somebody insist earlier this week that making babies is the answer to all our problems?).
Eric Hines
This is hard to support, as someone pointed out in a different venue. It's entirely possible he really believes this is the right way to go without a complete understanding (or a different one than ours) of the full set of implications of his position.
ReplyDeleteSo he's either a thief or an idiot. Either he knowingly wants to take money away from some by the use of government force, or he doesn't KNOW that he's asking for others to use government force to take money away from others. Given that he's a PhD in economics, Occam's Razor tells me it's more likely he's a thief.
Now I do not dispute he doesn't think he's a thief. But that's what he's doing. Robin Hood (as Grim mentions) WAS a bandit. Robbed from the rich, gave to the poor... we all know the tale. But no one uses the term "charity" with his actions. Motivated by noble intentions? Sure. Why not. After all, the Sheriff he was stealing from is clearly evil. In fact, pretty much all of his targets were deserving. As far as the stories go. But this isn't fiction. And retirees who planned for their future are not evil.
As with the "bravery" thing, I really think it's important to use words properly. If we use the wrong words to describe actions, we mask what those actions really are. It's why you're hearing about "reducing gun violence" instead of "gun control". OF COURSE it's still just the same old tired gun control it always was, but people are easier to sway when you state you are against "violence". To ever allow the use of "charity" when referring to taking money from someone else to do good works with clouds the fact that you're really just a thief with good intentions.
Retirees won't have enough money to retiree! What to do? . . . I know! Let's take money from retirement accounts!
ReplyDeleteAs with the "bravery" thing, I really think it's important to use words properly. If we use the wrong words to describe actions....
ReplyDeleteand
So he's either a thief or an idiot.
Not to put too fine a point on it, but in the interests of describing actions, maybe instead his behavior is either theft or idiotic.
Retirees won't have enough money to retiree! What to do? . . . I know! Let's take money from retirement accounts!
Won't work--the money taken from the retirement accounts really needs to go to those who don't work and so cannot achieve retiree status.
Eric Hines
Not to put too fine a point on it, but in the interests of describing actions, maybe instead his behavior is either theft or idiotic.
ReplyDeleteGranted and freely so.
The whole thing is a classic example of scope creep and the notion that liberalism has no limiting principle.
ReplyDeleteThe original purpose of Social Security was NOT to ensure that senior citizens never had to downsize after their kids grew up and moved away and they became too old or infirm to care for that 6 bedroom 2 story brick Colonial that made so much sense when they were in their 30s.
Once, it was a national disgrace that so many seniors were buying and eating dog food b/c they couldn't afford people food on a fixed income.
Now, we're supposed to hyperventilate at the thought that retirement might involve a few lifestyle changes?
This used to be classic Circle of Life Stuff. Now, it's a traveshamockery urgently requiring the redistribution of income from the haves to the have nots.
This guy's already got blacks, whites, and Hispanics (which last time I checked was NOT a race) at each other's throats. He won't be happy until Grandma is wrestling her grandchildren over the last slice of SPAM.
Aye chihuahua :p