From Ben Casselman’s post at FiveThirtyEight on the “erosion of the American Dream”:
The researchers identify two main drivers of the drop in mobility. First, economic growth has slowed in recent decades. That means the economic pie is growing more slowly than it used to, which makes it harder for each generation to surpass the previous one — there is less new income to go around. Second, income inequality has risen, which means that fewer people are benefiting from any new income being generated. Chetty and his colleagues estimate that inequality is more than twice as important as slowing growth, accounting for more than 70 percent of the decline in mobility.
Here’s another effect of the change in income distribution. Much is being made right now about a plan to reform Social Security. Social Security’s gravest problem is that one of its assumptions has failed.
Forty years ago 90% of income was subject to the payroll tax that funds Social Security. Now 79% of income is. The simplest way to reform Social Security is to restore the assumptions and raise FICA max so that 90% of income is subject to the payroll tax again.
Here’s something else that present economic conditions have shown to be unworkable: eliminating Social Security. If you can think of a way that ordinary people earning ordinary incomes can save for their retirements with interest rates as low as they are now, I’m all ears. To accomplish that now, you’ve got to assume risk and as soon as you assume risk there’s a possibility of losing your principle. If saving for your retirement means you must be prepared to lose your principle, we still need a Social Security program.
One of the other assumptions that is no longer true is the increased distance btw/ life expectancy and retirement age. I wonder if a better way to deal with this than increase the retirement age would be to go to a minimum number of years working.
I started paying FICA at age 14, but due to extended schooling did not make a living wage until age 25, and the first full year would actually be 26. Some of my classmates started full time work when they graduated (and I was 18), what if we expected everyone to work full-time for 45 years or something in that range? I’ve not seen this suggested before, so maybe I’m missing something. I think this is preferable to a complex system (resembling government pensions) that decide some jobs “age you more” than others.
I suppose there may be the effect of long-term unemployment that may make this inequitable, so perhaps the rule could be Age 69 (which is what the proposed bill suggests) or 45 years of work.
Forty years ago 90% of income was subject to the payroll tax that funds Social Security. Now 79% of income is.
How much of that is due to growth in state and local government employment?
Would be happy to see the income ceiling raised along with a benefit cap on the high earners however don’t expect to see it. From looking over gallup polling, I gather there is not enough public support for change.
… If saving for your retirement means you must be prepared to lose your principle, we still need a Social Security program.
A salient point that I have never considered in that framing. IRA and 401k plans are supplemental to SS, and therefore, there is a minimum amount of damage any one person can inflict upon one’s self.
I think that the classical or old-fashioned liberal positions should be taken out of the steamer trunk and dusted off. It is time for progressivism to be tossed onto the trash heap once more. I realize that liberals were “run out of town on a rail” by progressives and conservatives, but populism needs some clear headed thinkers to temper it.
Some people in some jobs CAN make it to 69, those who couldn’t I suppose would have to go the disability route which would mitigate the savings a bit. I see congress is in session today (Saturday) because of a filibuster regarding the coal miners pension fund holding up the budget and holiday break. We shall see if the idea that pensions are too big to fail, like Goldman Sachs and G.M. sets in, or if they tell old coal miners to go back to work.
If interest rates are higher, you don’t risk losing principle? At what rate would that happen?
PD- People at the lower end of the income spectrum have much shorter life expectancies. Retirement at 69 for them means 3-4 years of SS payments (16-17 years for upper groups).
Steve
Whoops! Sorry, the Democrats caved on that filibuster for the miners. What good are a bunch of broken down miners anyway?
They gotta die someday, why not today and save the Government money?
If interest rates are higher there are safer places you can park some or all of your money and thus reduce risk to principle.
Saving for retirement requires postponing present consumption until later plus earning interest on your savings. Largely risk-free savings are things like passbook savings or T-bills.
When interest rates are low you actually can lose money on passbook savings and the interest on low risk instruments like Treasuries is negligible. That means you’ve either got to climb the risk ladder, making riskier investments, which means increased possibility of losing principle or save the entirety of what you plan to spend in retirement by postponing present consumption.
Most people can’t postpone enough consumption to pay the entirety of their retirements.
ice- Weren’t you a math major? If interests rates are higher, parking money in a safe place means risking losing money by inflation, and at best, you only lower risk. Absent SS, how much risk do you think someone making $25k-$40k a year can tolerate?
Steve
I started paying FICA at age 14, too, and while I was in school I was actually earning about the same as the average worker did. All through school I worked 30-40 hours a week in addition to going to school full-time. After grad school I started at a wage typical of professionals at the time and quickly rose to have significant earnings.
I took 20 years of semi-voluntary income reduction as I tried, unsuccessfully, to build a business. Since going back to the rat race I’ve made good money. Between us my wife and I are earning enough to put us in the top 2 or 3% of income earners. In real terms our family income has been greater than either of our parents’ was at the same age but that’s with two income earners.
Keep in mind that I think that Social Security is necessary. I don’t think that most people are able to save enough for their own retirement without taking excessive risks which implicitly means that some will lose—which underscores the necessity of Social Security.
It’s one of the many differences of opinion I have with Republicans and/or anarcho-capitalists. I don’t think the world works the same way that they do.
As much as it hurts me to say it, Dave, we wouldn’t even be talking about social security for old age if we didn’t live in a capitalist society, producing enough wealth to sustain non-producers.
Gray- I think that is true. I also think that the contributions of those who didn’t make enough to sustain their retirement have helped to make those at the top ultra-wealthy. Not sure why they should not benefit from their work.
Pretty sure I didn’t contribute to FICA as a paperboy, so probably started at 15. Joined Navy at 17 then worked at least full time until now, except the last year of med school when I only worked part time.
Steve
Speaking of the loss of the American Dream:
U.S. life expectancy declines for the first time since 1993
Thank God they passed Obama Care to prevent this kind of thing, right?
The risk of losing principle due to higher rates is zero. But I digress…..
In a normal environment, as a practical matter you would have to walk fairly significantly up the interest rate risk ladder to run credit risk to your principal. And in a normal environment you would still have a real component to the nominal interest rate. Only unexpected inflation would erode purchasing power. The bigger issue right now is the principal loss the Fed has teed up as rates rise. (Interest rate risk) How fast and how much depends on duration (of your bond fund). The only way to avoid this is to hold individual issues to term, a luxury not available to most people due to net worth and diversification issues.
Once again, thank your Fed, and the politicians who endorse, or stand quietly by, them.
In the early days of Social Security, benefits were paid out to beneficiaries starting at age 65, which happened to correspond to the life expectancy of the Amerikan Black male. Now that the Black male has gained a life expectancy of around 69, expect a corresponding correction to the Social Security rules.
But talking about Social Security as a personal retirement fund is a canard. Social Security pays out to indigent spouses of workers, indigent children, the disabled and the indigent ex-spouses of workers if married for 10 years. Thus a person who starts paying FICA at age 18 and who marries 10 indigent spouses for 10 years each in succession, will effectively sextuple his personal benefit amount.
Correction: 5 indigent spouses for 10 years each in succession