Three-quarters of our fellow Americans have just said in a survey that they think everyone should have a defined benefit (or “final salary”) pension plan.
Phooey.
Talking is easy.
How many of them are really willing to fight for the retirement plan of the last salary we already have?
I’m talking about Social Security. And the answer is: Probably not many, based on how everyone talks, acts and votes.
About 242 million US workers and retirees depend on Social Security today or will in the future. But, as regular readers know, the program now has $ 16.8 trillion in the hole. Without a drastic solution, in about a decade, she will have to cut the benefits by about 20%.
However, you would hardly know about the last countless elections in the United States.
If we get to the point where Social Security really needs to be cut, it will be interesting to go back and look at the main headlines in the newspapers during the past five or six presidential elections in the United States.
To put the Social Security funding gap in context, there are 154 million contributing families in the country, according to the IRS. Therefore, filling the Social Security gap would involve an increase of one year on average … $ 110,000 per family.
In the words of Alec Baldwin in Glengarry Glen Ross, “Oh, do I have your attention now?”
(Maybe in Social Security we all need a moment of relaxation.)
President Biden’s proposals include an extra 12.4% tax on those who earn more than $ 400,000. (By the way, this would increase the maximum effective federal income tax marginal rate to almost 50%.) He also wants to expand benefits to those at the bottom end of the scale.
As MarketWatch’s Alicia Munnell says, in an interview with Think Advisor, tax increases are not enough and the extra benefits make the hole bigger, not smaller. Wharton says that such a plan would eliminate less than half the long-term financing gap.
As a nation, we have accumulated more than $ 17 trillion in national debt since 2000, paying for wars, bailouts, bailouts, tax cuts and boondoggles (choose your order). So, at a time when we need to get our hands on $ 17 trillion for the country’s main pension fund, we found that we were able to borrow $ 17 trillion … and spend it on all the other major pension funds in the country. .
Good job.
It is ironic that, 21 years ago, when the federal budget was balanced, President Clinton said that the number one budget priority should be “save Social Security first”. If only.
Meanwhile, a viable plan to close the circle, 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: Many of the people who make the rules don’t really depend on Social Security. Will they really sweat to find ways to save him?
In 2005, then President George W. Bush presented an incomplete, or possibly flawed, plan to “privatize” Social Security. Most of his plan was impractical or worse. But buried in it was a solid principle: that part (or even all) of our Social Security money should be invested in stocks.
There was, and there is, no reason why the trust fund should not be authorized by law to do this.
But this idea is so far outside the “overtones” window of acceptable solutions that people won’t even discuss it.
If it’s so crazy, why do all other pension funds invest in stocks?
If it is impossible, how can even Norwegians do this with their huge state pension fund?
Based on some basic math – and with a tip to Michael Kitces from Buckingham Wealth Partners, although I have updated the figures – we can calculate that Social Security today has a capital value of around $ 320,000 for the average retiring man at 67, and $ 380,000 for the average woman.
That’s how much you would have to pay to buy an inflation-adjusted equivalent lifetime annuity from a private insurer.
Therefore, a 20% cut would make the average man $ 64,000 poorer, and the average woman $ 76,000.
Meanwhile, the new survey suggesting that 77% of people support “pensions for all” turns out to be less than they appear. It is published by the National Institute for Retirement Research, a perfectly respectable think tank. But its original creators included the National Association of State Retirement Administrators and the National Teacher Retirement Council. And the survey appears as part of a document that affirms broad public support for state and local retirement plans.
An earlier version of this column incorrectly displayed the family’s net worth. Got corrected.