On Wed, Jan 05, 2005 at 11:52:13PM -0600, Dan Minette wrote: > The private investment part of social security would, of course, > be directly porportional to the amount invested. Thus, this would > promote a greater disparity between the people who's income places > them in the top 20% of wage earners and those who are in the bottom > 20%.
Yes, but not as much as you imply, if the wage cap is kept. The maximum contribution would be X% of the wage cap (where X's being discussed are about 2 to 4%). Still, there would be a difference. This could be addressed by having the government provide matching funds for contributions of people with below average wages. But personally, I don't think the government should be in the business of forcing income equality -- this is almost sure to hurt efficiency and growth in the long run. Rather, we should guarantee a humane minimum income level that we can afford to pay, and let ambitious people raise their own standard above the minimum as much as they are able. (The minimum level would be indexed to cost of living, and could be re-evaluated periodically to see if we can afford to raise it) > In addition, social security provides for the care of people who > were not gainfully employed, but took care of the home...with a 50% > spouse's benefit. And this is something that needs to be fixed. If you study the numbers, SS and welfare actually provide a DISincentive for the spouse to work in many low-income cases, since working would REDUCE the benefits that the spouse would receive. For people not on welfare, the marginal tax rate is not 100% for the non-working spouse, but it is still very high. Here is a table for lifetime net tax rate from Gokhale and Kotlikoff, "Does It Pay Both Spouses To Work?" (www.ncpa.org): Worker's Potential Worker's Earnings earnings $20K $30K $40K ===================================== $20K 80.6% 66.4% 58.6% $30K 43.8% 43.5% 42.6% $40K 45.3% 46.1% 45.6% Note that the highest federal income tax rate is 37.6%, so the spouse considering working faces much higher marginal tax rates, as high as 80.6% if the worker is earning $20K per year and the spouse is considering taking a $20K per year job. That certainly doesn't encourage people to work. And it falls most heavily on lower income people. > The elimination of 2/3rds of employee's pay from the benefits would > result in a reduction of the social security benefits. Remember that the total contribution to SS is currently 12.4% of wages up to the cap. If we divert 4% (the highest number I've seen tossed around), that is less than 1/3 of the SS funding being diverted. Which is substantial, and would need to be made up somehow if the current SS expenditure schedule is maintained. > Let me make some general, reasonable assumptions and run the numbers. > Let us assume that someone is gainfully employed for 40 years. That > person's salary sees a real increase of 2% per year (clearly the real > numbers are not the same for everyone, but this is a decent general > trend.) Let's say the person contributes 8.7% of their income to a > 401k plan (72.8% of the total SS tax, because according to recent > statistics, 72.8% of SS benefits go to retirees and their spouses > and children)...and gets the real averaged stock return of about > 6.6%/year. Should be 9% of income saved instead of 8.7% ( .728 * 12.4% = 9.03% ) Real 6.6% per year is optimistic. There is no reason to expect P/E multiples to keep expanding. The historical average P/E ratio is 16, and with a dividend payout ratio of 55% (historical average), the dividend yield might be expected to be 3.4%. Capital gains should increase at the same rate as earnings per share (EPS). Historically, EPS has increased about 2% slower than GDP (due to share dilution), and real GDP has increased at about 3.5%. So a good estimate for long-term real stock returns would be 3.4% + 3.5% - 2% = 5.1%. (That is for the very long term, right now they are likely to be lower since P/E ratios are above the historical average). Also, as you approach retirement you should not be fully invested in stocks. With TIPS providing a 2% real return, and if you start shifting your stocks to TIPS later in life, you might expect a composite average annualized real return of about 4%. > The nest egg they will have at the end of 40 years will be 13.6* their > yearly salary. Using the numbers above, it is about 8.6y > Using the standard rule of spending only 5% of the value of one's > retirement assets/year This is aggressive given current life expectancies, if that is a real rate. Inflation-adjusted fixed annuities are paying less than 4%. If you want to index your withdrawal to inflation, a 4% real value is a slightly optimistic number. > (investments should be more conservative when they are for short term > income) one gets a yearly return of about 49% of one's final income. Using 8.6y and 4%, we have 34% instead of 49%. > A single worker making 80k/year would clearly benefit. With my numbers, it is $27K per year benefit, inflation indexed. > A married worker, making 20k/year would clearly lose. $6.9K per year. But this "married worker" SHOULD "lose". The government shouldn't be providing such a weak incentive for the married person to work (see above). Besides, the married person doesn't need as much to live on as the single person, since the non-working spouse presumably lives rent free in the house of the working spouse. > Finally, the idea of switching to the inflation rate or median earned > income, instead of the mean earned income, for the the calculation of > future benefits does not seem unreasonable. The present SS benefits > does provide a floor that's not unreasonable. One way to do this > would be to phase it in over, say, 20 years. That should change the > calculations of costs for 40+ years out significantly, while not > providing a major impact. When I have time, I could run those numbers > too. Sounds good to me. Note that your proposal is more aggressive than the (sketchy) plans I've seen coming out of the White House. They are only talking about changing for people who have not contributed anything to SS yet, hence the 2075 date that is being thrown around. -- Erik Reuter http://www.erikreuter.net/ _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
