For Your Own Good

Over three years ago I wrote this article and guess what, nothing much has changed. Americans are on a new spending spree, retirement savings are still way short of necessary and Congress – a new Congress – has done nothing, nothing. 😰 

For Your Own Good Richard Quinn  |  May 3, 2018

IF WE WON’T SAVE for the future, should somebody do it for us? Everyone knows Americans don’t save; last year, we managed a miserable 3.4% of personal disposable income. That’s not going to cut it for either financial emergencies or retirement. We can’t even get many workers to save sufficiently to obtain an employer match in their 401(k) plan. That’s free money left on the table.

According to separate calculations by Alight Solutions and Fidelity Investments, one out of five workers don’t invest enough to get their employer’s full matching contribution. What can they be thinking? How are they spending?

My view: Except for those living in poverty, everyone can afford to save. What they can’t afford is a lot of their spending. With the problem well-recognized and no solution in sight, perhaps it’s time to go in another direction—a controversial one, I’ll admit.

Should we force more savings and, in the process, ensure that all Americans have a better stream of retirement income? One vehicle that’ll do that—here’s the controversial part—is Social Security.

First, we need to get our act together and ensure the current program remains solvent. “To illustrate the magnitude of the 75-year actuarial deficit, consider that for the… Trust Funds to remain fully solvent throughout the 75-year projection period… revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.76 percentage points to 15.16 percent.” That’s from the 2017 Social Security Trustees Report.

The current rate is 12.4%. This shortfall can be fixed in many ways, but let’s take a leap of faith and assume it is indeed fixed. Next, we turn to increasing retirement income. If we need 15.16% of payroll to keep what we have, we need something more for additional benefits.

Let’s say we add another 3% for employers and 3% for workers, for a total Social Security payroll tax of around 21%. In theory, that could boost the ultimate benefit by perhaps 40%. Even if employers lowered 401(k) matches as a result, many workers would be ahead of the game. And as long as we’re in the realm of the controversial, let’s invest that new money in the stock market, rather than Treasury bonds paying barely 3%, as is now the case. Yikes, partial privatization.

None of this precludes the need for individual savings, but it does ensure every worker saves something. It also boosts the retirement incomes for those less responsible. Heck, maybe that 3% should be 5%. These concepts are not new. But every time they or similar ones are raised, there’s political controversy and nothing happens.

Every government action to date to boost saving for retirement has met with mediocre success, in large because of individual behavior. Remember myRA? Like it or not, right or wrong, we can’t cut Social Security unless we somehow transform the average American’s often-irresponsible financial behavior.

What to do? My contention: If people can’t fix their own financial future—and it seems many can’t—perhaps we, as a society, need to fix the problem for them, by expanding Social Security and making everybody contribute more.

Source: For Your Own Good – HumbleDollar

8 comments

  1. “Except for those living in poverty”

    The poverty rate for single person is $12,500 per year income. But in many high cost of living areas on both coasts and a few large cities in the middle of the country, $25,000 per year and you are still living in poverty. The fix is not some government adjustment to SS benefits. The real fix is higher wages period. Higher wages for the bottom 25 % will allow workers the ability to save, or at least increase their SS benefit that they will receive.

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    1. “ But in many high cost of living areas on both coasts and a few large cities in the middle of the country, $25,000 per year and you are still living in poverty.”

      I suggest those people move to a lower cost area.

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  2. I do have to say that throwing more money into the giant maw of the government is a non starter for retirement savings in my book.
    The retirement plans such as 401k, 503b, IRA, Roth IRA and on and on are a hodgepodge with all types of rules for amounts invested and withdrawn and costs to the saver are all over the place. No wonder many don’t get involved. We blame the worker for not accumulating his own pension when many businesses gave up pensions because they were too expensive. They then decided to give some piddling 3% or whatever if the workers chipped in at least twice that.
    I say that a good solution would be for businesses to kick in a retirement fund amount per worker with the option of the worker to add more. Let Fidelity, Vanguard or any other large firm keep the accounts on a low fee basis. The federal TSP follows this model and it is proven to work.

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  3. You finish saying: “My contention: If people can’t fix their own financial future—and it seems many can’t—perhaps we, as a society, need to fix the problem for them, by expanding Social Security and making everybody contribute more.”

    Dick, those who aren’t saving are counting on you to step in, to take this on as a society and insulate them from the financial outcome from a failure to save. Interesting how you suggest workers should pay more taxes on wages instead of broadening the tax base to include, say, a higher income tax rate on Social Security benefits.

    As a 50+ year wage earner, count me out. Until Social Security is reformed from an entitlement to a contractual obligation, raising taxes is nothing more than colored bubbles – an opportunity for Congress to buy votes.

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    1. I don’t understand broadening the tax base by, say, a higher income tax rate on Social Security benefits. Most people can’t live on Social Security alone, but you are suggesting we should tax it more so they have even less Social Security to live on? If you’re not saying that, then I am totally confused.

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      1. Tired of solutions that tax wages of current and future generations of workers to award increased benefits to current retirees and those soon to retire. In other words, when I read this column, looks like another opportunity for Congress to buy votes – to immediately improve benefits for current retirees (Baby Boomers and older generations) while sending the bill to Gen X and younger generations, including individuals too young to vote and those yet unborn.

        FYI, I have been paying Social Security taxes for 50+ years and am a member of the Baby Boomer generation, now almost age 70 and still working.

        He states: “… Let’s say we add another 3% for employers and 3% for workers, for a total Social Security payroll tax of around 21%. In theory, that could boost the ultimate benefit by perhaps 40%. …”

        That’s likely to be a 40% benefit increase using the current formula with the current bend points – so, highly progressive. Everyone sees a 6+% decline in take home pay (FICA contributions are not pre-tax) up to the wage base. However, with the current bend points, everyone won’t get a 40% increase in benefits.

        Similarly, does anyone think Congress won’t award the benefit increases to everyone currently in a pay status and shove the added taxes down the throats of current and future workers?

        Time to stop enabling Congressional vote buying!

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      2. This is one more example of “don’t tax you, don’t tax me, tax that guy behind the tree” or “the best tax is the one I owe and YOU pay”. Congress has already awarded benefits far in excess of funding – such that the trust fund will be exhausted in about 12 years.

        Keep in mind that we have reduced poverty among those age 65+ from 30+% in 1960 to less than 10% today, and, if you adjust for wealth (as poverty is an income calculation), that’s probably a retiree population of less than 5% living in what you or I would call poverty.

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  4. I think it has gotten worse in three years.

    Baby boomers are dying off and all their parents who lived through the Great Depression had already passed away long ago. Everyone of my relatives that lived through the Great Depression learned to save and invest money. They were not depended on Social Security because it didn’t exist. Some even had windfall because of the way Social Security was structure and they lived into their 90’s.

    Since I started working, all I heard was politicians promising more Social Security (that was going broke), expanding Medicare, and national health insurance. I remember one union contract in the mid-1990’s that stated if a national health insurance became a reality, that our health insurance benefits may go away from the company. Obamacare did become a reality but it is not quite national healthcare.

    After the Covid stimulus money that paid people to stay home why would people save money at all. The government has demonstrated that they can be the nanny state. People think that socialism is good and will take care of them for doing nothing, until the state has total control and then you’ll get what the government decides you earned.

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