Posted: April 29th, 2008 | Author: Joe | Filed under: Economy, Retirement | 1 Comment »
A Social Security False Alarm?
I stumbled onto an interesting article the other day by Dr. Irwin Kellner from MarketWatch (via Yahoo! Finance). In it, Dr Kellner analyzes a recent report titled “The 2008 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds”, also known as the Board of Trusties for the Social Security program…
“Reports that the Social Security system will soon run out of money have been greatly exaggerated.”
This is reassuring… or is it?
Seems like each year the study is done, it yields rosier results:
“In 2000, the system’s actuaries thought the assets of this fund would be exhausted by 2032. Two years later it was 2037. Now the projected exhaustion date is 2041.
Meanwhile, the Congressional Budget Office, which makes these projections as well, recently thought the system will remain solvent until at least 2052.”
I suppose some could ascribe devious political motives to these results, but it seems that this is really due to the formula that is used to compute the costs of the Social Security program:
“…the actuaries have made and released not one but three projections. They call them low cost, intermediate and high cost.
The projection that has provoked these alarms is the intermediate projection. This reflects the trustees’ consensus views regarding such inputs as economic growth, productivity, inflation, earnings, employment and interest rates.”
At the heart of each method of calculating the end of Social Security funds is the assumption of economic growth – the faster the economy grows, the longer the program is solvent:
“The intermediate projection assumes that the economy will grow by an annual rate of 2.3% per year between now and 2085. This may be higher than the 1.9% per year that was projected as recently as three years ago, but it is still well below the 3.4% that the economy grew on average between 1960 and 2005.”
And if the economy grows at a sufficient rate, then we get the result reported by the Social Security actuaries?
“The actuaries’ own low cost projection assumes an average annual growth rate of 2.9% between now and 2085. This is higher than the 2.3% pace embodied in the intermediate projection, but it is still well below the 3.4% average of the past.”
“Under the actuaries’ low cost projection, the Social Security system never runs out of money.”
Well, that sounds great!
I don’t know about you, but I’m going to continue to ignore Social Security benefits where my retirement planning is concerned. If the system is still around when I retire, and I’m actually entitled to any of the money I’ve been forced to put in over the years then all the better.
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Click here to read the full report.
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Posted: April 28th, 2008 | Author: Joe | Filed under: Retirement | Tags: 401(k), Teresa Ghilarducci | 1 Comment »
“Economist Teresa Ghilarducci argues that we needn’t be chained to our desks forever.”
This is a my reaction to the 5 question mini-interview by Pat Regnier with Ms. Ghilarducci in this month’s Money Magazine. The folks at Money Magazine have one of these mini-interviews every month, and they typically focus on mutual fund managers and financial gurus. I will say this for them – they are always an interesting read. But this month, I almost fell out of my chair when I read this one.
“(Money Magazine) – Conventional wisdom says that since Americans are living longer, we should work longer too – and that 401(k)s are the best tool for funding whatever retirement we can hope to afford.”
This is probably true. We could argue whether a 401(k), IRA or Roth IRA are better, but the idea is the same regardless of the vehicle used.
“But Teresa Ghilarducci isn’t one for conventional wisdom. In her upcoming book, “When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them,” the New School University economist argues that a rich nation ought to be able to ensure a secure old age. And she has a radical proposal for making that happen.”
Whoa, this sounds promising. We don’t have to work forever AND we can have the safety of a pension again!
“(MM): One idea for fixing Social Security is to raise the retirement age, since life spans have increased. You don’t agree.
(TG): No. Just because we are living longer doesn’t mean we’re living healthier. …We may be raising the retirement age presuming people can keep or find suitable jobs when in fact that won’t be true. “
She makes a good point here. Many assumptions about retirement length and age treat health and quality of life as remaining constant and relatively good.
“(MM): Your book argues for a new retirement system that gets rid of the 401(k) tax break. Can you explain?
(TG): The tax breaks for 401(k)s and IRAs are worth $50 billion a year. What are we getting for that? People aren’t saving any more because of them; those who use 401(k)s and IRAs are moving money they’d already be saving from taxed to nontaxable accounts. “
We’ve all heard stories about how people never get around to saving for retirement and make many mistakes when they do, but I’m not sure what the part about them moving money from taxed to nontaxable accounts is about. It sounds like she thinks it’s bad that people aren’t paying taxes on their retirement savings!
She goes on to say….
“The 401(k) doesn’t even make top-paid people save consistently. The only answer, and this is after 25 years of looking at it, is to make people save: a mandatory, universal savings plan on top of Social Security.”
I’m not sure how this is the only answer to the problem of people not saving for retirement. In fact, many employers have taken steps to solve this problem already – such as “forced” enrollment into the company 401(k) with the money going into a life cycle fund. The major criticism with this approach seems to be only that it isn’t enough.
“(MM): But the 401(k) is kind of a sacred cow.
(TG): Whatever contributions you’ve made to your 401(k) still won’t be taxed, but most people will have to contribute 5% of salary to a public “guaranteed retirement account.” Only that amount will be pretax, and the government will contribute $600 a year. For those in top brackets, income tax will go up – but so will their retirement security because even if you’re tempted to stop saving, the government is saying, “You can’t.”"
This is where she really goes off the cliff. Maybe I’m way off base here (I’m sure comments will let me know), but her idyllic “guaranteed retirement account” sounds an awful lot like what the Social Security program was meant to be when it started back in 1935!
So, in short, since the government made such a mess of their forced retirement savings program over the past 73 years we need to create another version ON TOP OF THE ONE THAT IS HAVING PROBLEMS NOW?! And we have to pay a portion of everyone’s $600 “government” contribution.
No thanks.
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Posted: April 27th, 2008 | Author: Joe | Filed under: Saving, Uncategorized | 2 Comments »
Free Money Finance has a post that highlights the 10 Habits of the Prosperous from the book Does Your Bag Have Holes. I haven’t read the book, but I may put it on my library list.
They are simple habits, but worth a quick read. I’m actually quite surprised to see some of the comments. Quite frankly, it seemed like a common sense list but there is much more dispute in the comments than I would have expected. Still, it does give a 15 second overview of the differences in how the poor and the wealthy think of money.
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Posted: April 23rd, 2008 | Author: Joe | Filed under: Economy | Tags: Economy, Tax Freedom, Taxes | No Comments »
“America Will Work Three Days Less to Pay Taxes in 2008 than in 2007; Stimulus Rebates Push Date of Celebration Up“
This is from the Tax Foundation. Those are the folks that calculate the date at which Americans have worked enough and earned enough to pay their individual tax bill for the year. This is of course all a ball-park average.
Based on the latest government income and tax data, Tax Freedom day for the year 2008 is on April 23rd. That means we Americans have been working 113 days (“ignoring Leap Day”) to pay our taxes this year.
“Tax Freedom Day® had arrived later for the four previous years, but due to an expected slowdown in the nation’s economy and a massive one-time fiscal stimulus tax cut passed earlier this year, Tax Freedom Day® is projected to arrive three days earlier this year compared to last year.”
That seems like a good thing, but here’s a depressing statistic:
“Americans will still spend more on taxes in 2008 than they will spend on food, clothing and housing combined.”
Even with recent inflation pushing the price of food ever upward. Next time you feel angry gassing up your car or buying a gallon of milk, think about your taxes! That ought to be enough to put you into full cardiac arrest.
Check out this graphic to see just how big a bite the average American tax bill is as a percentage of his income:
As you can see, Americans need to work 74 days to pay their federal taxes, and another 39 days to pay for state and local taxes. Housing is a whopping 60 days! Maybe if things cool down at work, and after I’ve worked all this stuff off, I might have time to figure out what my personal rate is. 
That may be easier said than done however. The ever changing flux of tax rates and income make the figures vary. In fact, the actual date of Tax Freedom Day has varied greatly during President Bush’s two terms alone:
“In 2000, Tax Freedom Day® was celebrated May 3, the latest date ever. Then a string of tax cuts between 2001 and 2003 pushed Tax Freedom Day® up by more than two weeks, so that it fell on April 16 in 2003 and April 17 in 2004. For the next three years, incomes and tax collections soared, pushing Tax Freedom Day® back to April 26 in 2007. Now the stimulus rebates and a projected slowing of income growth have made Tax Freedom Day® come three days earlier, on April 23.”
It seems like a constant give-and-take in action. Some no doubt would say it’s more like a take-and-take, and they would have a strong argument when you consider that in 1900, Tax Freedom Day fell on January 22 and taxes were an average of 5.9% of personal income. Compare this with 2008 where Tax Freedom Day falls on April 23rd and taxes are an average 30.8% of income!
How Does Your State Rate?
All of the above is an average of the national data. Here’s a graphic that details where each individual state falls into Tax Freedom Day:
“Alaskans kick off the celebration of Tax Freedom Day® on March 29, more than a week before any other state’s taxpayers. Mississippi (April 7), Montana and West Virginia (April 8), and Alabama (April 9) round out the first five. The next five are Kentucky (April 10), Tennessee and Oklahoma (April 11), and New Mexico and South Dakota (April 12).”
You lucky Alaskans!
“Three states will have to wait until May to celebrate their state-specific Tax Freedom Days: Connecticut, New Jersey and New York.”
Go New York!
Well, it’s no surprise to us New Yorkers to see that we live in one of the latest Tax Free states. I wonder if more people knew this and really thought about what it means if we’d elect more responsible politicians… but that may be asking too much.
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