Three-quarters of our fellow citizens just said in a survey that they believe that everyone should have a defined benefit type (or “final salary”) pension plan.
Talk is cheap.
How many of them are really willing to fight for the final salary plan that we already have?
I mean Social Security. And the answer is: probably not many, depending on how everyone talks, acts and votes.
Some 242 million American workers and retirees depend on Social Security today or will do so in the future. But as regular readers know, the show now costs $ 16.8 trillion down the hole. Without a drastic solution, in about a decade you will have to cut overall profits by about 20%.
Yet you would hardly know it from the past countless American elections.
If we get to the point where Social Security has to be cut, it will be interesting to go back and look at the headlines of the major newspapers during the last five or six presidential elections in the United States.
To put the Social Security funding gap into context, there are 154 million taxpaying households in this country, according to the IRS. So, filling the Social Security gap would imply a one-year increase averaging… $ 110,000 per household.
In the words of Alec Baldwin at Glengarry Glen Ross, “Oh, have I caught your attention now?”
(Maybe at Social Security we all need a moment to put down our coffee.)
President Biden’s proposals include imposing an additional 12.4% tax on those who earn more than $ 400,000. (By the way, that would raise the top effective marginal rate of federal income tax to nearly 50%.) You also want to expand the benefits for those at the lower end of the scale.
As MarketWatch’s own Alicia Munnell says, in an interview with Think Advisor, tax increases are not enough and the added benefits make the hole bigger, not smaller. Wharton says this plan would close less than half of the funding gap in the long term.
As a nation, we have amassed more than $ 17 trillion in national debt since 2000, paying for wars, bailouts, rescue packages, tax cuts, and waste (choose your request). So at a time when we need to get our hands on $ 17 trillion for the nation’s top pension fund, we find that we’ve managed to borrow $ 17 trillion … and spend it on everything other than the top pension fund. country pensions.
How ironic that 21 years ago, when the federal budget was balanced, President Clinton said the number one budget priority should be “save Social Security first.” If only.
Meanwhile, a viable plan to square the circle, investing Social Security funds in stocks like any other pension fund, is not even on the agenda.
Why not? I hate to sound cynical, but many of the people who set the rules are not really dependent on Social Security. So are they really going to sweat a lot to find ways to save it?
In 2005, then-President George W. Bush presented a half-or possibly half-plan to “privatize” Social Security. Most of his plan was unworkable or worse. But buried in it was a solid principle: that some (or even all) of our Social Security money should be invested in stocks.
There was, and is not, any reason why the trust fund should not be empowered by law to do that.
But this idea is so outside the “Overton window” of acceptable solutions that people won’t even discuss it.
If it’s so crazy, why are all the other pension funds investing in stocks?
If it’s impossible, how can even Norwegians do it with their huge state pension fund?
Based on some basic math, and with a shout out to Michael Kitces of Buckingham Wealth Partners, although I updated the numbers, we can calculate that Social Security today has a capital value of approximately $ 320,000 for the average man retiring at 67 . and $ 380,000 for the average woman.
That is the amount you would have to pay to purchase an inflation-adjusted equivalent life annuity from a private insurer.
So a 20% cut would make the average man $ 64,000 poorer and the average woman $ 76,000.
Meanwhile, the new poll that suggests 77% of people support “pensions for all” turns out to be less than it seems. It is published by the National Institute for Retirement Research, a well-accredited group of experts. But its original creators included the National Association of State Retirement Administrators and the National Council on Teacher Retirement. And the poll appears as part of a document affirming widespread public support for state and local retirement plans.
An earlier version of this column incorrectly indicated the net worth of the home. Has been corrected.