4/9/16
I listened yesterday to a fascinating podast of a Jan 7 2016 Diane Rehm interview with Economist Teresa Ghilarducci: "How To Retire With Enough Money"
The United States is the only country on Earth that allows early withdrawals from retirement accounts that receive favorable tax treatment (tax-deferred contributions and compounding) according to the Diane Rehm's interview with economist Teresa Ghilarducci: "How To Retire With Enough Money". Ghilarducci believes that closing this hole would go a long way to helping with America's "do-it-yourself retirement system" which she calls one of the greatest failed experiments in economic history.
I've called our do-it-yourself retirement system one that is now composed of voluntary individual-directed and commercially-run 401 (k) s, IRAs a failed experiment. We took a bold step. We, the United States, in our retirement incomes policy about the beginning of the 1980s and implemented -- Congress was part of this and the retail, money management industry was also part of it -- implemented a bold experiment. No other country did it, to have people save for their own retirement, invest their own portfolios, decide how much to save and we gave them out, that if they if they needed it or wanted it before they retired, they could withdraw money before retirement, even though they were subsidized by tax favoritism.
The majority of Americans over age 50, have $30,000 or less saved for retirement. "And that will get you about $100 a month for the rest of your life to supplement Social Security. So I and my fellow economists are quite worried about what we call the retirement crisis. And we don’t use that word, crisis, lightly.
On October 7, 2008, she testified to Congress about helping individuals with toxic assets in their retirement accounts and swapping them for a government guaranteed retirement account . She was simply brain-storming, trying to stop the free-fall as 401-K's become 201-K's in a couple of weeks. It was a complex plan based on simple principles. Everyone could have a safe and secure retirement plan. Death threats begin to come in. They came from lots of people who became scared to death and she became the target for their fears.
She recommends plan that gives a guaranteed benefit, administered by the government using the existing social security infrastructure.
If everyone start saving even 3% between ages 20 and 25 or 6% to 10% to 15% in their 40s, they can supplement their social security income.
She said that there has to be some protection or if you lose 25% of your assets right before retirement, you never really catch up and instead will always be in the labor market or at least for a lot longer. The government could provide this security in the form of a guarantee.
It's totally false that that you will not get your benefit Social Security. At the very least you work at three-quarters of the promised benefits.
The idea that Social Security won't be there for you in retirement is a right wing myth. People have been predicting the demise of Social Security ever since it was established in 1935. 79% of Americans support Social Security and want revenues increased to shore up the system. It will always be there for you. We could even expand the system something we haven't talked about 30 years.
This extraordinary anxiety about retirement is unique to the American scene:
I have studied pensions systems all over the world. And unique to the American scene is a great deal of anxiety among older people. Not just because they hear from political elites every once in a while, the Social Security benefits need to be cut. Not true. Economists know it can be easily fixed…
They also know that the financial markets are out of their control and that their pension systems are based on what happens to the financial markets. That's a real shame… As you get older, the anxiety about money can actually lead to very unhelpful and unhealthful activities. I've heard of a lot of older people skipping lunch in their 70s and 80s, worried about not having enough money. More seriously, they skip going to the doctors or cutting their pills in half. This is very American. This doesn't happen in other countries and it shouldn't happen here.
Corporate pension funds for the last 35 years have performed better than individual retirement accounts or 401 K's. Why is this? Because pension funds have investment vehicles available, such as private equity and real estate, that are unavailable to 401-K investors. They also get professional investment management and know that the money will not or cannot be withdrawn for other short-term needs.
This aspect of the 401-K is completely flawed. Every $24,000 you take out of your 401-K deprives you of $100 a month.
Never pull money out of a 401-K to fund a child's college. Make sure your children go to colleges your family can afford. State schools are excellent.
Social security trust fund contains government bonds. By law, the federal government must pay these bonds a higher interest rate and they have never missed a payment on this. But Congress really backs up Social Security. Every time there is a short fall, Congress steps up and shores up the system. Eliminate the earnings cap which she recommends, raise the FICA tax and tweak benefits.
Raising the age of retirement is something she opposes; a raised retirement age is really a big cut in benefits. It doesn't mean that people can keep on working - it just means that they will much less money when they either get fired or laid off or can no longer work for medical reasons.
If you can delay Social Security, it's one of the best deals on the planet. If you don't have a terminal disease and you can keep on working do it that's her advice to everyone
"Every month or year you delay, you get a guaranteed rate of return of something between 6 2/3 percent and 8 percent at older ages."
The 110 richest Americans who make $110 million a year stop paying their social security taxes 2 hours into their first work week.
600 people who are the very richest Americans have actually stopped paying their Social Security tax by Thursday of the first workweek.
"So if we just raise the earnings cap, … [most Americans] won't see any increase at all. There's a lot of money at the top… to pay for our Social Security System. So I wouldn't worry about the deficit."
Over-spenders have always been with us. The main problem - why people don't save enough - is the design of the system we have. Over the past 35 years, we've asked all humans to anticipate their needs when they're older, to curb their consumption and to find an investment vehicle to save their money in. Oh, and by the way, they should decide where the federal funds' rate are going to be or what the risk of financial [markets might be]. We're really asking too much of people. So the main cause is not too many lattes or cables or car leases.
The problem is the design of our system relies on a voluntary, individual directed, really commercial-based system. We need to put back the designs that worked before, when even low-income people -- think of janitors, lady garment workers, home health care workers -- they have low incomes too, but they have a well-designed system to automatically save.
How much should you save?
As a rule of thumb she says you should have
1-2 times your annual income if you're in your 20s,
4 times if you're in your 40s and
8 times if you're on the verge of retirement.
A great way to spend less is "Don't live in a high-income neighborhood." You should live in a neighborhood where you are surrounded by people who earn the same or even a bit less than you do.
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