Pension Reform -- The Wisdom of Crowds Weekend Open Thread

by wj

One of the on-going problems for numerous governments, from Chicago to Greece, is that they have made big pension commitments without setting aside sufficient funds to meet them. (As distinct from those, like Social Security, which were basically designed to pay-as-you-go.) Pensions are funded based two parameters: demographic data on how long people will live and some assumptions on what returns they can get on their money over time. If the rates of return are wildly optimistic (as they so often have been, because it reduces current costs), the money won't be there.

The Economist as an interesting blog post on what a realistic long-term return on investment would be. It's based on some research comparing discount rates for leasehold vs freehold properties in Britain and Singapore. The idea being that, since the leases involved are for decades, the discount rate they display reflects what people really think returns on long-term investments should be. (Note: that same rate, it is suggested, should be used when evaluating other possible investments, such as infrastructure investments by governments, etc.)

For example, the Economist notes that: "If the fund’s assets are expected to return 6% each year, then a pension liability of $1m in 50 years’ time would warrant setting aside $50,000 of assets today. But if the assets only grow by 2% per year, then in 50 years’ time the $50,000 will only have grown into $135,000." Sound familiar?

The "wisdom of crowds" expectation for very long term returns: 2.6%.

What that means is, if your local government body has made pension commitments assuming an ROI higher than that, you are looking at a big problem down the road. And, if it has done so in the past, "down the road" may be upon you already.

Comments

[Tony P.]

wj,

Long ago, on the old usenet group sci.econ, somebody was pushing the notion that we should privatize Social Security because real annual returns on stocks are around 7%.

My sanity check on that was the following:

At 7% annual growth, capital doubles in about 10 years. Over 40 years, it grows 16-fold. So if you invest about 6% of your gross income at age 25, and let it grow at 7% for 40 years, it will amount to an entire year's gross income when you have grown to age 65. Do the same at age 26, you have a year's income at 66. Repeat every year, and 6% of a year's income at age 25+N turns into a whole year's income at age 65+N. You could therefore work 40 years, live on full income for another 40, and die broke at age 105-- if you can keep getting 7% annual returns over 80 years.

An ardent privatizer (but a reasonable guy) named Jim Blair pointed out that in years 65 to 105 you could be saving 6% again. After all, you were content to live on only 94% of your income during your 40 working years; same should hold in retirement. Now, you could fund yourself for ages 105 to 145. And of course, by repeating the process, you could LIVE FOREVER IN RETIREMENT -- if you can keep getting 7% annual returns forever.

This only reinforced my point, of course. If stocks, or any other investment, really did return 7% annually, consistently, and over the very long run, then (since people do die and leave their money to younger relatives) eventually every baby would be born a millionaire and nobody would ever have to work again!

So 7% is a ridiculous claim. Is 2.6% reasonable?

Well, money grows about 3-fold (2.8x to be precise) over 40 years at 2.6%, so in the above scheme you'd have to lay aside about 1/3 of your annual income during 40 working years, if you expect to live 40 years in retirement at the same standard. If you only expect to live 20 years in retirement, you can keep to about 1/6th, or 16%. If you're willing to allow a slightly lower retirement income -- say 5/6ths, because that's what you were living on anyway -- then you can save slightly less than 16%.

Social Security amounts to saving around 12%, counting both employee and employer halves, which is "slightly less than 16%". Or a lot less, depending on how you care to modify the assumptions. Or maybe SS has it just about exactly right.

--TP

[Brett Bellmore]

I recall a famous quote, which I'm doubtless mangling, to the effect that, if you invest $1 a day at 5% interest, in 100 years you'll be a millionaire.

And $25,000 will buy you a hamburger.

In the year I left college, inflation was very high, and I bought a universal life policy which had a guaranteed rate of interest of 9%. The insurance company apparently thought inflation would never go down. I thought otherwise.

Soon inflation had dropped back to close to zero, and I was putting every cent into that policy I could afford, in the expectation that I'd retire in my late 30's.

It was then that the insurance company proved they understood life better than I did: They went to court, and got a judge to lower the guaranteed interest to 4%, and never mind that contract I'd signed in good faith with the insurance company.

I've never forgotten that lesson in the realities of investment.

[wj]

The whole life insurance contract that I signed in my early 20s wasn't quite that good. But it was for $10K, which in the early 70s was a lot of money (i.e. substantially more than I made in a year, and I had a good paying job). Then inflation hit, and today it would probably cover the expenses of wrapping up my estate.

A lesson I've never forgotten in the realities of inflation. Not to mention that, in economics, things will not remain static -- which puts me ahead of most people.

[Countme-In]

Don't the Oath Keepers have an armed platoon dedicated to contract law that can be dispatched to look into financial corporations who break their promises to the citizenry?

[Snarki, child of Loki]

"I've never forgotten that lesson in the realities of investment."

So very true. From crooked individual brokers/advisors to lawyered-up corporate greedheads, an individual is terribly vulnerable to having their carefully-gathered nest egg plundered.

It's one of the best arguments for the 2nd Amendment, IMO.

[Snarki, child of Loki]

Count: Jinx!

[byomtov]

Brett,

That calculation is about right.

But you do need to distinguish between nominal rates, which include expected inflation, and real rates, which don't, and reflect actual gains in purchasing power.

[byomtov]

The flaw, or one of them, with the whole "privatize Social Security because the stock market offers better returns argument" is that it won't.

Returns don't come out of nowhere. They are generated by the operations of businesses. The notion that the return companies earn on their capital will somehow dramatically increase because a bunch of people buy vast amounts of stock in those companies is silly. You would see a one-time jump in stock prices, after which returns would be much less than before.

[Tony P.]

Bernie,

You might add this: whether retirees collect a certain amount of income directly from the "operations of businesses" in the form of dividends, or whether government collects the same amount of money in the form of taxes to pass on to retirees, the bottom line for businesses is exactly the same.

--TP

[Tony P.]

Snarki, you left out Republicans.

The GOP scam wrt to SS is truly spectacular. For almost my entire working life, SS has been collecting more from us boomers than our parents were taking out, in order to "pre-fund" our own bulgey retirement. The Trust Fund was invested in Treasury bonds. Now the GOP line is "Sorry, those bonds are worthless because, hey, we already spent the money." I'd like to see them try that line on the Kochs or the Chinese central bank.

--TP

[Brett Bellmore]

"But you do need to distinguish between nominal rates, which include expected inflation, and real rates, which don't, and reflect actual gains in purchasing power."

And real real rates, which take into account the fact that the government is lying about the rate of inflation. (As anybody who buys groceries is aware.) I currently keep my meager savings in a bank account with a nominal rate of return which is negligible, a 'real' rate of return that's zero, and a real real rate of return that's substantially negative. Investments that actually have significantly positive real rates of return are even legally prohibited for most people, under qualified investor rules!

IMO, the real problem with social security, as with other public pension plans, is that it makes the productivity of the next generation into a commons. When people relied upon their children to support them in their old age, they had a fairly direct interest in having enough children, and making sure they were productive and well socialized. If they didn't they might starve in their dotage!

Now we route that support through the government, in such a way that your old age support does not appear to depend on your having children, or their being productive. But, of course, on an average basis it still does.

The standard tragedy of the commons: It costs the individual to produce the children who will support him in his old age, but that support does not, nominally, hinge on this actually producing them, and so productive children get under-produced.

The birth dearth in welfare states isn't hard to understand, is it?

[Snarki, child of Loki]

Well, I was going to post my opinion that "investing for retirement" is very nice, and necessary for a comfortable old-age.

But one want to have a "subsistence level" component, that is risk-free, barring apocalyptic-level malfeasance. So that you won't starve to death on the street when your crooked broker runs off with your nest egg.

SS isn't that good as an investment, but it's outstanding as a super-low-risk support: backed up by a huge economy, with inflation-protection mechanisms built in, and with widespread participation.

Of *course* the GOP is working on their "apocalyptic-level malfeasance": there's a huge pot of money just sitting there!

[Brett Bellmore]

"Of *course* the GOP is working on their "apocalyptic-level malfeasance": there's a huge pot of money just sitting there!"

That's kind of the point: There ISN'T a huge pot of money just sitting there. It got spent as fast as it came in.

Look, if I have money coming in, and I give it to somebody else to spend in return for an IOU, the IOU represents an asset of mine, because it is a claim on somebody else's assets.

But if I have money coming in, and spend it, and put my own IOU in a jar, THOSE IOUs do not represent an asset, because they are a claim on my own assets; Cashing them in doesn't bring me any funds I didn't already have, the IOUs do not contribute in any way to my capacity to spend.

Unfortunately, SS bonds, by law only held by the Treasury, fall into that latter category of IOUs; They don't represent an additional potential source of money over and above tax revenues, because it is only those tax revenues that can pay them off.

No, there's no huge pot of money. Never was, it was always a lie.

[wj]

But Brett, the "birth dearth" doesn't occur just in welfare states. It has been experienced in every developed economy -- and some which are still some ways from reaching that point. So maybe it isn't the "welfare state" which is responsible.

Either that, or somehow every developed economy is a welfare state. Which would be an intereswting factoid in and of itself, wouldn't it?

[byomtov]

Um.

Could we not go off on a Brett Bellmore tangent here.

First, the government does not understate the inflation rate. It's not lying. Among other things, the billion-price index, a non-government project, closely tracks the CPI. I really hate to see the thread get hijacked because Brett read some wingnut stuff and wants to make an issue of it.

Second, the whole SS Trust Fund business has been hashed to death, and there's no point in going around again. Those who are interested in actually understanding what's going on have plenty of sources. Those who want to yell wingnut slogans should be ignored.

[russell]

I have to say, Brett's 1:25 provides an interesting twist on Hardin's "Tragedy of the Commons" essay from 1968.

Hardin claimed the welfare state encouraged people to have too many kids, thus stressing finite resources. Brett says SS encourages people to have too few kids, because somebody else's kids will pay the bills.

SS does not make the "productivity of the next generation" into a commons. The concept of a commons has a reasonably crisp definition in current economics, which is not applicable to concepts like "the productivity of the next generation".

The "classic tragedy of the commons" is basically horsecrap. It was basically made up as a justification for privatizing common land in the 18th and 19th C. In actual historical practice, people did not abuse common resources out of "enlightened self-interest", because (a) they existed in a social context where "enlightened self-interest" wasn't held out as the be-all and end-all of human motivations, and (b) their neighbors wouldn't let them even if they were so inclined.

Commons were subject to management. The issue of some guy grazing 20 cows on common land when he was only entitled to 10 didn't come up, because it would result in 10 of his cows ending up in the pound.

The same things apply to Hardin's essay. Hardin himself has stated that his essay should have been titled "The Tragedy of the Unmanaged Commons", which is correct. And, speaks to the need for things that *actually are commons* to be managed, and not left for any random dude to abuse through "enlightened self-interest".

None of which is relevant to your argument, because the productivity of hundreds of millions of people is not a commons.

Argument by analogy is like rhetorical Calvinball.

[wj]

there's no huge pot of money. Never was, it was always a lie.

I managed to figure out in my early 20s that I was unlikely to ever see a dime out of Social Security; that it was just another income tax, and should be regarded as such. Which observation influenced what kind of savings for my retirement I did from the beginning.

That's really good for my personal position. But I shudder to think of my fellow Boomers who didn't bother to save for retirement because, after all, there would be Social Security -- which, even if it remained in place was never going to do more than protect against one starving on the streets.

[CharlesWT]

People over 65 are, as a group, the wealthiest people in the country.

I recently had cataract surgery. It cost me about 20% out of pocket. It would cost Bill Gates the same if he even bothered to use Medicare.

[Countme-In]

Apparently human beings have a detailed chin-wag while in the heat of passion regarding their retirement plans far down the road and the resultant upsides and downsides of getting pregnant.

The conversation is so riveting that they forget to use birth control, the bodily fluids run amok, and then young women visit an abortion clinic and tell the onsite counselor that the reason for aborting the fetus is the promise of a lousy $12,000 bucks a year some 35 years down the road.

Hobby Lobby is planning on counseling all of their female employees of child-bearing age that sexual abstinence is preferred because the checks start arriving in roughly 2050, so who needs birth control through the company plan, anyhoo?

Unless you are black, then reverse the reasoning.

Get on up!

https://www.youtube.com/watch?v=HdOdLHNPzTw

[Countme-In]

Apparently human beings have a detailed chin-wag while in the heat of passion regarding their retirement plans far down the road and the resultant upsides and downsides of getting pregnant.

The conversation is so riveting that they forget to use birth control, the bodily fluids run amok, and then young women visit an abortion clinic and tell the onsite counselor that the reason for aborting the fetus is the promise of a lousy $12,000 bucks a year some 35 years down the road.

Hobby Lobby is planning on counseling all of their female employees of child-bearing age that sexual abstinence is preferred because the checks start arriving in roughly 2050, so who needs birth control through the company plan, anyhoo?

Unless you are black, then reverse the reasoning.

Get on up!

https://www.youtube.com/watch?v=HdOdLHNPzTw

[Countme-In]

Apparently human beings have a detailed chin-wag while in the heat of passion regarding their retirement plans far down the road and the resultant upsides and downsides of getting pregnant.

The conversation is so riveting that they forget to use birth control, the bodily fluids run amok, and then young women visit an abortion clinic and tell the onsite counselor that the reason for aborting the fetus is the promise of a lousy $12,000 bucks a year some 35 years down the road.

Hobby Lobby is planning on counseling all of their female employees of child-bearing age that sexual abstinence is preferred because the checks start arriving in roughly 2050, so who needs birth control through the company plan, anyhoo?

Unless you are black, then reverse the reasoning.

Get on up!

https://www.youtube.com/watch?v=HdOdLHNPzTw

[Countme-In]

My mouse had triplets.

[byomtov]

wj,

But your conclusion turned out wrong, didn't it?

That's not to say that saving for retirement wasn't a very good idea. But I do seem to recall the widely publicized notion that retirement financing consisted of a "three-legged stool" - private saving, private pensions, and Social Security.

No doubt many people, either through improvidence or lack of resources or various unfortunate circumstances rely solely or primarily on Social Security. But it is there.

[Snarki, child of Loki]

Yes, a "three-legged stool".

And then the corporations bailed on their pension obligations.

And then the banksters trashed the economy, and lots of people lost their investments.

So some people teeter on a one-legged stool, while the GOP is busily trying to saw through that last leg.

[wj]

Well, they are still paying out, so I hear. But personally I haven't seen that dime. Yet. ;-)

(It's nice to be able to put off starting as long as possible. It's my own version of the lottery -- pass up some cash now, for the prospect of larger cash later.)

[wj]

So some people teeter on a one-legged stool, while the GOP is busily trying to saw through that last leg.

Only consider. Suppose the trashing of Social Security succeeds. And suppose further that the folks pushing it believe as Brett does -- that people are having fewer children because the "welfare state." So, now the masses will stop using birth control and go back to having lots of kids! What's not to like?

[CharlesWT]

Payroll taxes are a transfer from the young and relatively poor to the old and relatively wealthy.

One reason for having fewer children is the expense. A cost that competes with other things people would like to spend their money on. Payroll taxes don't make it easier.

[Tony P.]

Charles,

Inheritances are a transfer from the recently-old and relatively wealthy to the young and relatively poor -- who thus get a bit of help becoming relatively rich in their own old age. Transfers across generations work both ways.

Furthermore, what is your personal savings except a transfer from your younger to your older self? What is your personal borrowing except an advance from your older to your younger self? Transfers across generations are a way of life.

Let's not bad-mouth "transfers".

--TP

[CharlesWT]

There's a difference between consensual and coerced transfers.

[cleek]

No, there's no huge pot of money. Never was, it was always a lie.

everything is a conspiracy. always.

[wj]

Inheritances are a transfer from the recently-old and relatively wealthy to the young and relatively poor

My first reaction to this was: Nonsense! After all, in the last decade or so we lost one of my parents and both of my wife's. All of whom were well past 80, but the youngest of their heirs pushing 50 -- i.e. not really young at all.

But then it occurred to me that, just maybe, my family was not exactly typical in this regard. Amazing the things that open our eyes to the obvious.

[Countme-In]

Marie Antoinette's head in a basket was a coerced transfer, because .... cake.

[Tony P.]

wj,

I'd say 50ish people inheriting from 85ish people is more typical than not. If so -- if the dead old tend to leave their money to the young old -- it's not astonishing that retirees might be "relatively wealthy".

Between you and me, of course, I don't take the "relatively-wealthy old" construct too seriously. It's a talking point for sure, but is it a fact?

--TP

[CharlesWT]

Contains charts of wealth by age groups.

Wealth Is Distributed Extremely Unevenly Within Every Age Group

[byomtov]

CharlesWT,

Fascinating link. Thanks.

One point not mentioned, but which is stunning to me, is the difference between mean and median in the various age groups.

Look at the top two charts. The mean wealth in each age group is a multiple, between 3 and 7, of the median.

[CharlesWT]

Yes, wealth is distributed on a power curve instead of a bell curve.

[wj]

Not to disagree with your words. But they actually apply to the distribution within age groups.

No reasonable person would expect wealth distribution by age to resemble a bell curve. After all, we (mostly) start out from school with little or nothing, and proceed to build up or wealth over time -- assuming we bother to build it up, of course.

[CharlesWT]

The mathematical law that shows why wealth flows to the 1%

[byomtov]

The mathematical law that shows why wealth flows to the 1%

Actually, it doesn't show that at all. The power law is descriptive, but without an underlying model of the process it says nothing about why wealth should follow the particular distribution it does.

And even if you can show that, you have to show why the parameters have the values they do in the particular case of wealth distribution in the US.

[Countme-In]

You have meddled with the primal forces of nature!

The King of England actually said that first.

[byomtov]

Which King?

[Countme-In]

"One of the on-going problems for numerous governments, from Chicago to Greece, is that they have made big pension commitments without setting aside sufficient funds to meet them. (As distinct from those, like Social Security, which were basically designed to pay-as-you-go.) Pensions are funded based two parameters: demographic data on how long people will live and some assumptions on what returns they can get on their money over time. If the rates of return are wildly optimistic (as they so often have been, because it reduces current costs), the money won't be there."

Seems to me the confluence of two American traits have created a whirlpool of anxiety.

Tell em, like Brett's insurance company telling him, that we've put aside reserves to handle all eventualities over heah, nothin to worry bout, didja read the small print? nevah mind, you're in the good hands of Allcrap, heah's five to tide you ovah, one, two, whoops, look ovah deah, geez, dat was close ... five ......... combined with, ya know, the shining City On the Hill, look how shiny it is, your fellow Muricans will do you wise in the end, won't we, yeah the commission's upfront, what, am I a putz, and could you designate heah where I marked which end you'd like it in.

Call me a cock-eyed optimist. But don't,whatevah you do, call me Ronnie.

We are the Greece of the tax evaders and the short changers.

That's our heritage.

Not Socrates and Aristotle and whodjamacallit, Heraclitus, which sounds, now dat I tink about it, like a social disease.

He's gotta dose of heraclitus, did ya heah?

You never step into the same river twice.

Now, dog shit, dats a different madda. It's amazin, given marketing surveys, how often the same guy will step in the same pile of financial dog shit oveah and oveah again.

Americans count on it.

[Countme-In]

Which King?

The one we defied, so's we could live among ourselves, the many Kings, who want a lotta little pieces of us, which adds up to the same thing.

[bobbyp]

In the olden days, most old people died much earlier or sold pencils on the street. Old people were poor as hell.

Social Security and other government assistance programs have decrease the incidence of poverty among the elderly dramatically.

The 401k policy has been pretty much a failure as many now approaching retirement have nowhere near enough savings. When they chopped defined benefit pensions, the business community effectively gave workers a pay cut.

Increasing Social Security benefits is the answer.

[bobbyp]

Dean Baker has more.

[wj]

If increasing Social Security benefits is the answer, where do you propose to get the money?

Not arguing whether it is the answer or not. Just wondering how you propose to go about funding it.

[CharlesWT]

I've heard that the Federal Reserve has a printing press...

[wj]

Cool! We can spend a little extra adding a zero to all of our pension checks. And to all of the price tags. Such a marvelous improvement for all concerned!

[russell]

In the olden days, most old people died much earlier or sold pencils on the street.

Yes, what bobbyp said.

It's kind of a standard article of conservative rhetoric that, in the good old days, youngsters took care of old folks in their dotage, and now we don't do that anymore, because of government programs.

Youngsters didn't always take care of old folks in their dotage as a matter of obvious course.

Lots and lots of people take care of their old folks nowadays, in spite of the oppressive burden of government programs.

If you want to advance that argument you need to demonstrate two things:

1. People used to directly care for their older generations to a degree significantly more than they do now

2. If so, the reason for the change is government programs, and not the other 100 factors that contribute to it

We need to see (1) and (2), otherwise it's just nostalgic wankery. And demonstrating (1) is not a matter of anecdotes about how Aunt Sarah took in your Granny Jones.

I want numbers.

[russell]

If increasing Social Security benefits is the answer, where do you propose to get the money?

Increase the income cap on SS.

It will cost me money, personally. Do it, because it needs doing.

[joel hanes]

The "classic tragedy of the commons" is basically horsecrap.

Tell that to the North Atlantic cod fishery.

Or to the Oglala Aquifer.

[byomtov]

The 401k policy has been pretty much a failure as many now approaching retirement have nowhere near enough savings. When they chopped defined benefit pensions, the business community effectively gave workers a pay cut

Bobbyp,

I don't think it has much to do with chopping defined benefit pensions. A big part of the motivation for 401(k)'s, IRA's and so on was, IIRC, concern over the effectiveness of DB programs. There were enormous issues of vesting and portability, as workers increasingly switched jobs. The result was that lots of pension benefits were simply lost, so there was a move to attach them more closely to the worker. That all seemed to make sense at the time.

What happened, IMO, was that company contributions were never adequate to provide retirement security. Probably, that means the promises of DB plans were likely not to be kept, because the plans were underfunded. So you are comparing an illusion with reality.

And DB plans have other defects as well. Companies go broke, sometimes, or are bought in ways that mysteriously make pensions disappear. Or the plans just change. IBM, I think, was a notorious case.

What is needed, I think, is strict requirements about funding, for both private and public plans, as well as more help, including greater transparency, for those in 401(k)'s.

[bobbyp]

If increasing Social Security benefits is the answer, where do you propose to get the money?

Where did GWB get the money to squander our resources in Iraq? Why were my SS taxes raised significantly in the 80's and rich people given endless tax cuts in the interim? Why did conservatives never ask about where to get the money to pay for star warz?

With all due respect, wj, I find that to be little more than a rhetorical question.

Eliminating the cap will address nearly all of the projected "shortfall". We can still do better and raise benefits significantly.

Have you ever stopped and asked yourself how all those companies in the past could afford defined benefit packages? Where did they get the money?

See here.

Or here.

[Countme-In]

Yes, but Joel, you overlooked Russell's stipulation "for the need for things that "actually are commons" to be managed, and not left for any random dude to abuse through "enlightened self-interest".

Random dudes, for whom the Constitution was written.

[bobbyp]

Cool! We can spend a little extra adding a zero to all of our pension checks.

We have spent decades fashioning public policies to give rich people even more money (more "zeros" if you will).

Tell me, sir, what is the difference?

[bobbyp]

byomtov,

Good points. But I would argue that the driving force shifting from DB to DC retirement plans was because they cost the employer less and shift risk to employees, and perhaps also incentivized by public policy, as pointed out here.

[wj]

russell: Increase the income cap on SS.

A sensible move in any wise. But enough to do more than maintain the current levels into the future? I'd like to see some numbers on that before getting too optimistic.

[wj]

bobbyp: Where did GWB get the money to squander our resources in Iraq? . . .

With all due respect, wj, I find that to be little more than a rhetorical question.

He got it exactly where conservatives routinely accuse liberals of getting money (frequently with complete accuracy): by mortgaging the future to avoid facing the reality of the cost.

Now politicians, of all stripes, do this routinely. But we here are trying (at least I am trying) to find a way to fund these things without abandoning reality. I'm open to changes, and eliminating the cap would be a good start. But as I said to Rusell, I would like to see something resembling real data to show that raising the cap would be sufficient.

Have you ever stopped and asked yourself how all those companies in the past could afford defined benefit packages? Where did they get the money?

Don't have to ask, as it is entirely obvious. Eliminating (or just cutting back) benefit plans, including pension plans, reduces costs and thus increases profits. Which increase then went into a) larger payouts to shareholders, and b) larger bonuses for the executives.

They could get the money again, but it would require smaller paychecks for the executives, and smaller dividends for the shareholders. (And, as an aside, would tend to reduce the skew in incomes/wealth across the population. You can fight it out with Brett as to whether or not that would be a good thing.)

[Tony P.]

About a month ago, I had to make a DB/DC decision.

I worked for some years for the old DEC -- long enough to get vested in a small defined-benefit pension. After I left, Compaq bought DEC. A bit later, HP bought Compaq. Fidelity has managed the HP retirement plan for many years. Recently, they began bombarding me with offers to roll my HP pension entitlement over into a personal IRA.

Without going into absolute numbers, the offer boiled down to two options worth considering: take $X as a one-time roll-over today, or stay with the DEC deal of $Y/month (nominal dollars) starting at age 65. By my calculation, I would need 5% (nominal) returns on the $X for about 30 years in order to draw $Y(nominal)/month from 65 until 30 years from now, when I shall be either 88 or comfortably dead.

Gentle reader: what would you have chosen, in my place?

--TP

[Brett Bellmore]

"Tell em, like Brett's insurance company telling him, that we've put aside reserves to handle all eventualities over heah, nothin to worry bout, didja read the small print?"

Count, I think perhaps you do not understand what happened with my universal life policy. I did read the fine print, every bit of it. It was unambiguously on my side. The insurance company went to court, and got a judge to permit them to unilaterally CHANGE the print!

Being a naive youth, I hadn't considered the possibility that the legal system would alter a contract entered into voluntarily by both parties, just because it turned out to be more favorable to the smaller party than the larger party had anticipated. After all, if things had turned out the other way, they'd have required me to comply to the point of bankruptcy, rather than kindly rewriting the policy for me. While the insurance company wasn't looking at bankruptcy, just some unprofitable years due to the policies they'd foolishly written over a couple of years worked through the system.

[russell]

Tell that to the North Atlantic cod fishery.

Or to the Oglala Aquifer.

A very apt point, and amen.

I'll restate - the tragedy of the commons as originally presented in the context of the enclosure debates was horsecrap. It ignored the fact that, in actual practice, commons were not subject to abuse, because they were generally well managed.

It was a hypothetical thought experiment, not an accurate description of the real case, which was advanced to justify privatization of the common resources.

And, whenever it appears in public discourse, it tends to have the same character, to this day.

None of which is to say that there are not thing that are common goods, in the economic sense, and which *ought to be managed as a commons, but are not*. Or, are not, to a sufficient degree.

So, North Atlantic fish stocks, and the Oglala aquifer, among others.

What I take away from those examples is that there is a need for more effective management of those resources *as a commons*. Not that they should be delivered into private hands for management.

[russell]

I'd like to see some numbers on that before getting too optimistic.

The CBO analysis. Not enough for a complete fix, but enough to make a very large difference.

And, isn't it wonderful that we have a government that makes this information available to us at the click of a mouse, so we can make more- and better-informed decisions about these things.

Speaking of transfers:

I'd also like to follow up Tony P's 1:04 by noting that responding to SS shortfalls, whether real or imagined, by reducing benefits rather than increasing revenues *is a transfer*, from the folks who have paid into SS at rates greater than expenditures for the last 30 years, to the folks today who refuse to accept either an increase in SS taxes to fund the shortfalls, or an increase in general revenue to *pay back what was owed*.

In practice, it's a transfer of the "productivity" of the entire working public for the last 30 years, to folks who would prefer to not have the SS cap raised, or the top marginal rates increased by some single-digit number of points.

And, in practice, since SS is a highly regressive tax, it is largely a transfer from the not-wealthy to the wealthy.

We spent the money. Now the bill is due. Time to pay up.

Gentle reader: what would you have chosen, in my place?

Tough choice. The odds that you will ever actually see the $Y/mo are the big unknown.

To some degree, you have to read the fact that they even presented you with the option as their declaration of intent to be shed of the DB obligation.

So, how much confidence do you have in assurances given by HP / Fidelity?

[Brett Bellmore]

"I'd also like to follow up Tony P's 1:04 by noting that responding to SS shortfalls, whether real or imagined, by reducing benefits rather than increasing revenues *is a transfer*, from the folks who have paid into SS at rates greater than expenditures for the last 30 years, to the folks today who refuse to accept either an increase in SS taxes to fund the shortfalls, or an increase in general revenue to *pay back what was owed*."

I'd like to note that you seem to have problems with the direction of causality, and the nature of time. In the past, transfers of wealth from myself to, for instance, my parents, took place. These are part of the unalterable past.

In another decade, transfers from other people to me might take place. Reducing these would not retroactively alter the past. Neither would increasing them.

[bobbyp]

He got it exactly where conservatives routinely accuse liberals of getting money (frequently with complete accuracy): by mortgaging the future to avoid facing the reality of the cost.

Please explain how this is so.

Perhaps this will help you.

Yes, we do have a retirement crisis, but it is not the one you think it is.

[liberal japonicus]

a bit late, but

Youngsters didn't always take care of old folks in their dotage as a matter of obvious course.

This is interesting cause I think that people who look on the past nostalgically are not lying, but are failing to understand structural conditions that made those things possible.

When a majority of the people lived in the town they were born in, or if the children got a job and then had their parents relocate to be near them, they probably did take care of their parents. I mean, imagine you live in a place where everyone knows you AND knows your parents and they see your dad living on the streets caging change. That's a pretty big incentive to make sure that they have a roof over their head. As this sort of multi generational family disappeared, that pressure/obligation to take care of the older generation was moved to out of sight/out of mind.

Unfortunately, people who think that the good old days were great often fail to understand that a lot of what they are nostalgic for was supported by a network of other conditions that have long since disappeared.Some of those conditions (like segregation or sexism) were not so good, others (people living in the same town as their parents, and having multi-generation families together, head of the household getting paid a living wage) were good, but have been dismantled by progress.

[Tony P.]

Brett,

Can you please rewrite your 8:59 comment in English, after you've had your coffee? You might have a coherent point in there somewhere, and I'd like to understand it if you do. But the best I can make out from your actual words is that "the past" doesn't count, and you're fine with that. And I have a hard time squaring that with your complaint about a court changing a contract YOU signed in the past.

Russell,

I have more confidence in Social Security than I do in Fidelity. It's more likely that Fidelity will go out of business during my remaining lifetime than that SS will, in my view. After all, DEC went out of business, and Compaq went out of business; the jury's still out on HP. Still, I have reasonable confidence that Fidelity (or its successor) will fork over the $Y/month when the time comes.

The big uncertainties for me were:
1) How long am I likely to live? If I live to 100, collecting $Y/month, Fidelity loses. If I only live to 70, Fidelity wins. If I die tomorrow, Fidelity wins big.
2) How much will $Y (nominal) be worth 10, 20, 30, or 40 years from now? Fidelity stands to me as debtor to creditor. Inflation favors debtors.
3) How likely am I to manage the $X lump-sum rollover so as to get the consistent 5% returns that (by my calculation) Fidelity is planning on? Past experience suggests: not bloody likely. Fidelity's apparent eagerness to push the rollover option suggests that maybe they're worried about achieving 5% returns themselves, but they still have a better shot at it than I personally do.

In the end, I stayed with the defined-benefit $Y/month option. Partly because $Y is a pretty small amount anyhow, and not worth agonizing too much over. And partly because, under the DEC legacy rules, I can still decide to take a lump-sum rollover at 65. Overall, I'd describe it as a "close call" rather than a "tough choice".

lj,

In Greece, houses tend to be built on a concrete post-and-beam framework. Quite often, you see re-bar sticking up out of the posts of an otherwise-finished house. The reason is that the Greek dream is (or at least, was) that the kids would grow up locally and build their house(s) on top of the old folks' house.

That sort of family togetherness does have its good points, as you say. But I have long suspected that most Americans have liked Social Security over the decades precisely because they preferred paying FICA to living upstairs from their parents.

--TP

[thompson]

Increase the income cap on SS.

On the subject of removing the cap:

http://crfb.org/blogs/setting-record-straight-social-security

According to the Social Security Chief Actuary, repealing the taxable maximum would close about seven-tenths of the program’s 75-year shortfall, and only about one-third of the gap in the 75th year. Senator Harkin’s legislation on the whole would close only one-half of the 75-year shortfall and one-fifth of the shortfall in the 75th year.

But russell's CBO link is good too.

Also relevant to consider generational views on this, which I find a fairly striking:

http://www.pewsocialtrends.org/2012/12/20/the-big-generation-gap-at-the-polls-is-echoed-in-attitudes-on-budget-tradeoffs/

Over half of young adults don't think benefits will be at the same level when they retire.

[Hartmut]

Tony P, another reason for that Greek practice is that one has to pay no taxes for 'unfinished' buildings there. Once the house is formally finished property taxes would apply. Greeks have been hereditary tax evasion artists for centuries (a necessary, even essential survival trait in the past) and see no reason to change those habits. Greece has always been so dysfunctional that tax honesty was foolish at best if not outright suicidal.
Who can blame them now that all money the state takes in gets confiscated instantly to pay foreign corporations holding Greek debts and the rich Greeks that transferred their wealth* abroad do not get importuned in the least?

*e.g. with help from Dutch firms and tacit suppport by the Dutch government in exchange for a share

[russell]

I'd like to note that you seem to have problems with the direction of causality, and the nature of time.

I believe the issue is your failure to understand the concepts of "borrow" and "repay".

[bobbyp]

thompson,

when the crfb claims right off the bat that the current Social Security operational deficit is "contributing to the deficit", a statement that is, at best, misleading, i take the rest with a grain of salt. the crfb is funded by Pete Peterson...'nuff said.

the current younger generation has been exposed to a well funded propaganda campaign against 'entitlements' for decades. it is no wonder they believe as the survey shows. however, if they act politically as the GOP asks, the belief will become a self fulfilling prophecy.

[cleek]

Over half of young adults don't think benefits will be at the same level when they retire.

distrust of SS's future is a perennial thing. it's been around since the program's founding.

[Countme-In]

Brett wrote:

"Count, I think perhaps you do not understand what happened with my universal life policy. I did read the fine print, every bit of it. It was unambiguously on my side. The insurance company went to court, and got a judge to permit them to unilaterally CHANGE the print!

Being a naive youth, I hadn't considered the possibility that the legal system would alter a contract entered into voluntarily by both parties, just because it turned out to be more favorable to the smaller party than the larger party had anticipated. After all, if things had turned out the other way, they'd have required me to comply to the point of bankruptcy, rather than kindly rewriting the policy for me. While the insurance company wasn't looking at bankruptcy, just some unprofitable years due to the policies they'd foolishly written over a couple of years worked through the system."

Oh, I get it.

There is plenty to get.

[thompson]

a statement that is, at best, misleading

Someone upthread wisely suggested that the whole SS trust fund thing has been hashed and rehashed, there is little reason to enter into that discussion. If you think the SSA numbers are wrong or have been misrepresented, I'd be curious to learn more.

the current younger generation has been exposed to a well funded propaganda campaign against 'entitlements' for decades. it is no wonder they believe as the survey shows.

And the possibility that people who are farther away from retirement than you are might have a different view for good reason doesn't exist? It's all propaganda?

[russell]

IMO this gets the gist of it, in plain and simple language.

There are two sort of separate issues to consider.

One is whether repaying the intra-governmental debt that is represented by the T bills held by the SS trust funds increases the deficit.

The answer is yes, it does. And, like all sovereign debt obligations, we will have to find the money to repay it, or default on our obligations. We have never done so, and doing so by f***ing over the people who have paid into SS at a rate greater than expenses for the last 30 years would be a really crappy place to start.

If we don't have the money to pay our bills, we need to raise more money, or find things to not spend money on. Not paying back money we borrowed doesn't count as a thing to not spend money on.

And "oops, sorry, we spent that money, so we don't have it in our pockets to pay you back" is sure as hell not a good plan.

The second issue is that, in about a generation, the trust funds will be used up. At that point, we hit a brick wall, and benefits will have to be cut by about a quarter, immediately.

To address that, we need to increase revenue into the SS program. Again, that means raise more money. Or, we can find things to not spend money on. So, our choices are raise taxes in one way or another, or reduce SS benefits.

My understanding is that much of the gap in the second case can be met by some combination of increasing the SS income cap and means-testing benefits.

Both of those seem like reasonable things to do, to me, and both seem preferable to taking benefits away from people who have, in good faith, paid toward them over a lifetime of work, and who have relied on them being available as part of their retirement planning.

SS is already a highly regressive plan, in terms of how it is funded, making it slightly less so does not seem out of line.

Or, of course, in about a generation, we can just flip the bird to all of our old folks.

In about a generation I will probably be senile or dead, so it's all the same to me either way. I just think it would be a shame to flush what has been a remarkably popular, useful, and successful program, all because we don't want to make wealthy people feel put upon.

There are some folks who would be happy to flush SS just because it's a government program and WE HATES THEM WE DO!!! But those folks are, basically, in the minority, so it behooves the rest of us to not let those folks dominate the conversation and decision-making.

And yes, I am considering SS and the general federal budget as two separate pots of money, because legally that is what they are.

[russell]

The "wisdom of crowds" expectation for very long term returns: 2.6%.

As such, it apparently tracks the real growth of the economy reasonably closely.

Which makes sense.

[Countme-In]

Some propaganda, but the usual suspects believe the same thing about Social Security, Medicare, what have you:

http://talkingpointsmemo.com/livewire/david-brat-free-market-obamacare

Apparently, every time a guy signs up his kids for Obamacare, or a Social Security payment keeps an elderly, demented person off the streets, the lights dim in America.

Of course, the guy's name is "Brat".

Charles Dickens must have christened him.

[byomtov]

Russell,

There are two sort of separate issues to consider.

One is whether repaying the intra-governmental debt that is represented by the T bills held by the SS trust funds increases the deficit.

The answer is yes, it does. And, like all sovereign debt obligations, we will have to find the money to repay it, or default on our obligations.

Let's be careful here. Repaying the SS trust funds increases the deficit in the sense that, if we didn't repay, the money would be available for other uses, for which we will now be required to borrow. True.

But that is no different than repaying Treasury borrowing from other sources. Stiffing a creditor is stiffing a creditor.

[liberal japonicus]

But I have long suspected that most Americans have liked Social Security over the decades precisely because they preferred paying FICA to living upstairs from their parents.

I agree completely, and here in Japan, the cohort of foreigners who came here at the same time I did is now at the age where we have to think about aging parents, and talk more often turns to these issues. What the folks peddling nostalgia don't point out is that supporting ones parents in their old age goes hand in hand with a general inability to pick up stakes and move to a different city or state or country. The provision of SS goes hand in hand with a more mobile population. As with all trade-offs, it is hard to be certain what we are gaining is better than what we lost.

[Tony P.]

Hartmut,

Thanks for that bit on the Greek property tax loophole. I guess I knew about it -- that is, I know I've heard it mentioned before, by Greeks and possibly even by you. I have not kept up with Greek doings for many years; do you know whether the loophole is still in place?

thompson,

The people "who are farther away from retirement" than russell or me will of course be able to make up their own minds about how much to tax themselves, and how to divvy up their taxes between "entitlements" and everything else.

I will never tire of pointing out that the first American who will be retiring 75 years from now has not been born yet, and is only marginally likely to be born before presumptuous old farts like Alan Simpson and Pete Peterson are likely to croak.

--TP

[bobbyp]

Operationally, the ss fund cashing one of their bonds is exactly the same as pete peterson cashing one of his.

Both contribute to the current deficit, but somehow one is a crisis and the other is not.

Now one can view SS as 'just another' program that has to be funded. In that case the argument is "who pays"? What the rich are basically saying is, "Not me."

This, after decades of tax cuts for them.

That is why the crfb framing of the issue is misleading. it assumes these tax cuts must necessarily stay in place going forward.

[wj]

We have spent decades fashioning public policies to give rich people even more money (more "zeros" if you will).

Tell me, sir, what is the difference?

The difference is between nominal and real dollars. If you get 10 times more dollars, but they still by the same amount of stuff, you haven't really gained anything. You income, in real dollars, is unchanged.

Whereas, if you get 10 times more dollars, and they but 10 times more stuff, you have really gained something.

See the distinction?

[wj]

The CBO analysis. Not enough for a complete fix, but enough to make a very large difference.

Thanks for the link, Russell. Note, however, that what this will do is reduce the shortfall for current benefits. Which is certainly worth doing, but isn't the same as funding increased benefits, which was the immediate point in question.

[thompson]

Tony:

The people "who are farther away from retirement" than russell or me will of course be able to make up their own minds about how much to tax themselves, and how to divvy up their taxes between "entitlements" and everything else.

I get the impression that's a little tongue in cheek, but I appreciate the statement none-the-less. :)

I will never tire of pointing out that the first American who will be retiring 75 years from now has not been born yet

Suggesting what, exactly? As true as that statement is, I plan on being very much alive as those people start paying payroll taxes. How those voters feel about the program and its viability may not affect you, Tony, but it very much will effect me and my plans for retirement.

bobbyp:

Now one can view SS as 'just another' program that has to be funded.

IMO, we should consider all government outlays as things that need to be funded, at least on the longterm.

That is why the crfb framing of the issue is misleading. it assumes these tax cuts must necessarily stay in place going forward.

No, but it does suggest that the money required to continue SS in its current form come at the expense of other costs:

In addition to the potential economic consequences of a 12.4 percent rate hike, a tax increase that large would make it politically challenging to raise more revenue from the wealthy, if it all. The government has many important needs, from financing growing health care costs to investing in infrastructure and education to keeping debt levels under control. Raising that much revenue to fund Social Security (including higher benefits for wealthy seniors) would suggest that spending more money on retirement benefits for seniors is a higher priority than other options including new investments or spending on children.

[Donald johnson]

I never did understand how returns on the stock market could be higher in the long run than the growth rate of the economy--assuming that is true in the first place. If it is true, it maybe has something to do with what Piketty writes about. (Sooner or later I should get around to reading that book).

[wj]

Fidelity has managed the HP retirement plan for many years. Recently, they began bombarding me with offers to roll my HP pension entitlement over into a personal IRA.

Tony, the thing you have to ask yourself first, when this happens, is Why are they doing this?

It could be that all they are trying to do is shift the uncertainty from them to you. Except that, having a large pool of future retirees, they can work out statistically how much they are likely to have to spend. An option that you, having a statistical pool of one (1) do not have.

The more likely motivation is that they have figured out that they don't (and won't) have the funds to cover their future obligations. At least, not without putting a lot more money into the pot. But if they can manage to dump the problem of lack of sufficient growth onto you, they can get clear.

[Donald johnson]

The political problem with means testing SS benefits ( or so I've read) is that once you do this, then SS becomes less of a right that we all have and more of, well, a kind of welfare program. And once Americans start seeing something as welfare or as redistribution or whatever, that program is in real trouble.

[wj]

And the possibility that people who are farther away from retirement than you are might have a different view for good reason doesn't exist? It's all propaganda?

As far as I can recall (and no doubt someone will correct me if I'm wrong), any time that someone disagrees with Brett, it is the result of propaganda from the (MSM) media. If Brett has ever actually said here, "Thanks for the additional information. I will reconsider my position." (let alone actually saying "I was wrong"), I seem to have missed it.

Not sure that everyone else has admitted to being in error at some point. But a lot of other people have done so.

[thompson]

The political problem with means testing SS benefits ( or so I've read) is that once you do this, then SS becomes less of a right that we all have and more of, well, a kind of welfare program.

I've heard that as well, Donald. I don't know how absolute that is, but it is reasonable I suppose.

I think that's a discussion we need to have nationally, and arrive at some sort of consensus about. Is SS basically a federally run retirement account that we pay into in the expectation of getting a return? Or is it a welfare program so that retirees aren't put out on the street? A combination thereof or something else entirely?

[thompson]

wj:

any time that someone disagrees with Brett, it is the result of propaganda from the (MSM) media.

I'm not sure what Brett's relevance to my response to bobbyp is. But broadly dismissing claims because 'propaganda' is unproductive.

[Countme-In]

To be more precise, the political problem with means-testing is that the usual propagandistic (of the sort bobbyp notes) demagogues of a certain stripe will now appeal (gear it up for every election) to those means-tested with "why should you be paying for these parasites who blah, blah, blah) and then we're off to "welfare reform" and instead of insisting that fat black welfare mothers STOP having babies, the same suspects will demand that fat, black welfare mothers have MORE babies so the kids can take care of them in their old age.

The well is poisoned. The country is full of shit and made so purposefully.

[wj]

Sorry, Thompson. I thought that *your* comment was referencing Brett's on-going position.

[thompson]

I thought that *your* comment was referencing Brett's on-going position.

Ah, sorry. Looking back, the comment was a little opaque.

[wj]

In a thread like this, things can get confused all too easily. Especially when I come in on the West Coast, and find a couple dozen comments have appeared before ever I got out of bed. (No doubt lj and Hartmut have similar problems. ;-)

[Hartmut]

Tony P., I do not know, whether they closed the loophole by now. I fear it would not matter much because the 'reforms' forced on them could be no more destructive to their economy and tax base, if they had been designed for that very purpose.
Greek is (and has been) a basket case for many reasons, both internal corruption and international sharkery and now it's vampires selling their victim blood, so they can suck on it longer while presenting themselves as selfless paramedics.
And btw, I am not aware that selling them weapons has stopped either. We all know that interfering with profitable arms races is a no-no. Sooner or later they will need all the stuff to fight it out with their archenemy and NATO ally Turkey (also a cherished customer of the same weapons manufacturers). Germany can't afford to lose this highly lucrative trade (we even pay the manufactures for subs that we then give away for free to Israel).
The only problem is that Greece (a favorite holiday destination) has become a wee bit hostile to our tourists. Their government must do more to keep the rabble in line (provided they spent no money on it since gutting those services too is top priority).
Greece got itself into a huge mess mainly through its own faults but I can fully understand the Greeks for their hostile reactions to the 'help' they get.

[Countme-In]

Poison:

Means-test Social Security/Medicare and the response will be to means-test the parasites who continue to receive their full benefits, to wit, prevent the use of Social Security money for purchasing cruise line tickets, Cheetos, lingerie, iphones, qphones, wphones, theater tickets, etc, and for good measure, the money formerly provided via monthly Social Security checks will be available only in $25 increments at the fee-based ATM.

Just so with Medicare.

Say it ain't so.

It's nice to have a reasoned discussion.

Unfortunately, those in the ascendancy pushing "entitlement reform" who actually wield power are no more than sadistic pigs.

And there is only one answer to sadism.

And it ain't masochism.

[byomtov]

JFTR, Social Security is subject to a sort of "soft" means-testing now, since benefits are partly taxable to recipients with significant outside income.

[byomtov]

Donald,

I never did understand how returns on the stock market could be higher in the long run than the growth rate of the economy--assuming that is true in the first place.

It is possible, I think, if a large part of financing is debt. Debtholders take a lower return on their investment in exchange for seniority and consequent lower risk. The stockholders get a bigger cut, in exchange for assuming more risk.

Of course, total returns in the economy cannot be increased simply by converting debt to equity.

[bobbyp]

No, but it does suggest that the money required to continue SS in its current form come at the expense of other costs

That's what they want you to believe. Look, forecasting the economy 75 years out is pretty much a wild guess-depending on population growth, productivity, etc., etc. The SS trustee's reports are very, very conservative in this regard. If the economy were to grow at a little over 3% a year going forward, then actually the trust fund is never exhausted.

Secondly, yes, the folks like Pete Peterson have consistently painted the darkest of future prospects for political reasons-1. to keep the tax cuts for the wealthy in place; and 2. to delegitimize support for these programs so they can fund programs they like.

So what they implicitly argue is that the social security tax is just a tax like any other and (despite the letter of the law) should be viewed from that standpoint.

Then it is the government that has a spending problem, not "entitlements". OK?

Having a conversation of who gets what is, I would agree with you, one we should have, but painting wild eyed panic scenarios (with lots of scary 0000's, 75 years out to cut benefits today (which, by the way does absofuckinglutely nothing for future beneficiaries) is essentially dishonest.

cf the recent Mcardle piece and wild eyed left wing responses here, for example.

[bobbyp]

thompson,

"No, but it does suggest that the money required to continue SS in its current form come at the expense of other costs..."

and then you quote a snippet that does precisely that.

Somehow the Pete Petersons of the world never come right out and state, "let's assume your social security taxes are just taxes and have a conversation".

Because they know it would never fly.

[bobbyp]

"Of course, total returns in the economy cannot be increased simply by converting debt to equity."

It's not exactly the same, but public expenditures on things like infrastructure, education, etc., financed by debt that take slack out of the economy are similar, and provide more assets upon which future generations can build.