----- Original Message ----- From: "Erik Reuter" <[EMAIL PROTECTED]> To: "Killer Bs Discussion" <[email protected]> Sent: Thursday, January 06, 2005 7:10 AM Subject: Re: Social Security
> 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. That's reasonable...but I was not advocating something that strong. What I was saying is that the progressive nature of the present calculation is beneficial...whereas the private investment accounts are simply a linear function of income. Progressive taxes do the same. So, I'm not advocating a forced flat curve, just the kind of policies that, for the last 70+ years, have fostered a general middle class. In short, it is keeping inequalites within bounds through nudging instead of forcing perfect equality. >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) OK, that's generally reasonable. > > 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. Welfare does, but Social Security really doesn't, at least according to my reading of the Social Security website. The only exception to this is if the spouse works at a job that doesn't require the payment of the social security tax. > 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): All I saw there was http://www.ncpa.org/~ncpa/w/w77.html > 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. But, I think they are doing funny math. Let me do a back of the envelope: There are two cases: the husband alone has a 20k/year job and the husband and wife both have a 20k/year job. With standard deductions and all, filing jointly, the incremental income tax burden on her job starts at 10% and switches to 15% when the net taxable income reaches 14,300. So, let's just call it 15%, knowing its really slightly under that. Her SS and Medicare direct taxes are 7.65%. Her employer also pays a 7.65% tax that I'd list as a benefit, because her salary of 20k/year does not include this payment. So, we have just under 23% in marginal federal taxes. I'm sure that the couple would spend more if they made more, and would pay more sales tax. But, all of their spending wouldn't be subject to sales taxes. With a sales tax around 6% as in Texas, we'd probably see about 26% taxes including these items. Maybe with all the other taxes on the phone bill and what not, we'd get near 30%, but there is no way I can see the number coming close to 40%. > > 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. Right, but 1/3rd of SS goes to disability and such. The figure I saw was 2/3rds of the employee's contribution, which would be just over 4%, but I won't quibble on the difference. So, either half or just under half of the SS payments associated with an individual would be removed if they went with the investment option. > > 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. I guess I'm not clear. Let me first go through a rerunning of the SS benefit numbers, using the formula you quoted. With all the caveats that everyone gives about assumed changes in previous year incomes, etc. here is what I have..from that formula. Income Single SS Married SS (including spouse benefit) 5000 4500 6750 10000 7460 11189 15000 9060 13589 20000 10660 15989 25000 12260 18389 30000 13860 20789 35000 15460 23189 40000 17060 25589 45000 18534 27802 50000 19284 28927 55000 20034 30052 60000 20784 31177 65000 21534 32302 70000 22284 33427 75000 23034 34552 80000 23784 35677 85000 24534 36802 90000 25284 37927 The single 80K person would be looking at <24k with the present scheme, but 27k with SS tax that pays for retirement invested according to your figures. (I realize that only about half is proposed, but that just results in an average of the two numbers. The married 20k person would be looking at almost 16k with the present scheme, and 6.9k with the investment option. Clearly, he shouldn't pick the investment option. Now, the arguement about the disincentive for a second income. A second income will only reduce the social security benefit if it is an income that is excluded from social security tax. Otherwise, the benefit for that person is the maximum of the benefit they would get working on their own, and the benefit they would receive as a spouse. http://www.elderlawanswers.com/resources/s8/r33570.asp For example, lets say one spouse worked 35+ years, with an income of 20k (with all the averaging and indexing). The benefit their spouse would receive as a spouse of someone making 20k year would be $5330/year. They would receive that unless they had an income for those years (with all the averaging and indexing of course) of greater than $6100/year. In that case, their benefits based on their own earned income would exceed the benefits based on working in the home while their spouse had gainful employment. Let's go back to your example of the benefits of a spouse working for 20k/year. If she were to do this for as long as her husband, their SS benefits would be $21319, vs. 15989 if she didn't work outside the home. That isn't as good as if he made 40k by himself ($25589), but it is better than her not working at all. > > 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. Every quote I see talks about "younger workers who don't think they will see a dime of SS" being able to invest part of their SS tax for themselves...indicating that some people working now could designate part of their tax to a private account. We are obviously reading the hints differently...but as we both noted, there probably isn't enough meat on the proposal yet to allow us to determine what the hints actually mean. One final point about www.ncpa.org The page I quoted has folks born in '94 and later paying taxes of 84% because of the evils of Clinton, so I'm thinking that creative accounting went into numbers at this website. If you could point me to the basis for their accounting, I'd appreciate it. Dan M. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
