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June 15, 2009

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Retirement savings is already mandatory, it's called Social Security. I find it unlikely that Obama is going to let me opt out of that one.

We need to have an opt out program that will flag a person from receiving any benefits in retirement should they decide NOT to participant in a retirement program. Therefore the rest of the responsible individuals will be absolved for paying for individuals that decide NOT to participant. I would rather be responsible for my own retirement (401K, Roth IRA, IRA, etc) then allow the govt decide how much I need to pay into the program (Social Secruity)and recieve.(BTW pay for individuals that have not contributed to the program as you noted) Most responsible individuals could do a better job saving for retirement than allowing the govenment do it for them.

In Canada we have the CPP which is a forced retirement savings as well as OAS which is kind of like social security. If a couple together make the average $500 for CPP each. and $700 each for OAS. That puts combined 2400 a month, or 28800 a year. Considering we allow income splitting of pension income, and we have tax credits for age that would be total take home for a couple who saved nothing on their own for their whole life.

The CPP and OAS I believe are both indexed to inflation too. If you purchased a modest home and had it paid off before you retire, you can live quite a comfortable life in most areas on that. We also have RRSP accounts, similar to a 401K, for those that want to secure their own retirement.

I see 2 possible solutions to this, neither of which I see being implemented anytime soon.

1) Go all big government, become Socialist, Federal Healthcare, Federal Retirement, everyone is comfortable, no poor. Though, there is little incentive to start a business, or put forth and new and great ideas. Hated by: most people with money, people who like little government, right wing.

2) Go incredibly small government, cut most social program, federally give nothing to poor/impoverished, make everyone responsible for their own lives/choices. Rely on private donations to help those who need it. Hated by: those who are poor, those who are lazy/have little personal drive, left wing.

Personally, I really don't care which one we choose, as long as we would just choose instead of messing around in the middle. Perhaps we just split the county in 2 and let people decide which one they want.

I don't agree that the system is broken. I also don't think we have to choose between 2 extremes as suggested by Shaun.

Social security at present is enough to live on--it will keep you from starving.

Want more? It's pretty simple: all you have to do is plan better, don't drop out of school, work harder, and save. Not too hard to understand.

Apart from the disabled, why shouldn't we expect everyone to be able to do this? How is that "mean"?

I'm a "bleeding heart" liberal, BTW. But I don't see any reason why I need to support the old age of someone who couldn't be bothered to get a job/career/education/savings account during his or her entire life.

I think we need to do a couple of things.

1. We need to have automatic enrollment for all 401ks. If people want to opt out, they can, but make them sign up to opt out. 90% of people will not opt out.

2. Have 401k savings automatically roll over into an IRA when people change jobs. We have to make it much harder for people to cash in their 401ks when they change jobs.

3. We must find ways to get small employers to provide 401k type plans. Unfortunately, most people will simply not sign up for IRAs on their own.

4. Last but not least, we need to teach retirement planning in high school. People get no eduation in this stuff and then we expect them to save for their own retirement. That is stupid.

It's such a shame that Social Security was not architected correctly to start with. It would be illegal for any private company to setup a pension that runs like Social Security.

I would propose Social Security be run as follows:

Currently Employer and Employee contributions total 12.4% (6.2 each, the other 1.45 each goes to medicare).

Of this 12.4% a certain percentage should be diverted into a govt pool to pay for 2 things. 1. The insurance portion of social security that provides for survivor benefits for minor children in the event of the early death of a wage earner and 2. To subsidize the accounts of extremely low wage earners. I don't know what this diversion percentage should be but I would argue that 2.4% of the 12.4 should be enough to cover it. The majority of social security money simply goes to pay benefits to retirees. One might argue that the subsidized portion needs to be bigger and that could be so even if you took it to 3.4% thats still leaves 9% that would go to ones own retirement.

Then of that 9-10% that should be owned by each individual contributor. This is the much ridiculed privatization plan that has been tried. The problem with privatization is its nearly impossible to do from where we are. If it had been done from the beginning it would have been very viable. And for something that is designed to be secure for retirement you do not allow people to make their own investing decisions. This is not a 401k. Its similiar to a pension or an annuity. It must be invested only in the strictest and safest of instruments just as an annuity that guaranteed income for life would be. There could maybe be a few different options that let you "invest" it a little more aggressively but more aggressive would be a relative term that would still be mostly in fixed income instruments.

Upon retirement whether the money is drawn out like a 401k in installments or annuitized etc is something that could be debated and I would be fine with either case.

But this system works 100% of the time. It's 100% sustainable. It never needs to be "fixed." Thats why its required that private companies do something closer to this (although even they cheat and underfund their pensions, this could never be underfunded, it just follows the rules). People who make a lot less would get less but would be subsidized, exactly as social security works today. It just wouldn't ever run out when retirees start to overwhelm the working population.

If that had been done, this question wouldn't come up. If it could be transferred to, it would be great but I don't know how to do it without basically screwing the middle generation who has to work during the transfer. They have to somehow pay for the retirees and then fund their own retirement accounts. It doesn't work because earlier generations drew money out that they never paid in. That was good for them, not so much for us.

What do do about Medicare? I have no idea. It's a complete mess. And nothing I have heard yet does anything but make things worse. I can only see two paths. The govt starts paying for less things medically. Or it pays for more and rations them. The result is the same, less care. There is no other way to not go broke on this system.

I'd much rather see Medicare taxes raised to the point of supporting a solvent system, or pass a single-payer government healthcare scheme to lower costs, than to "force" retirement savings. Private healthcare costs are going to rob you of your 401k and Roth savings due to the nature of the demographic bubble of less than healthy baby-boomers who are just beginning to retire in large numbers. If you can't set aside savings of at least 3% from your twenties for retirement, then you shouldn't receive anything from the government other than SS and Medicare/Medicaid.

Social Security was founded in the Depression as a social insurance program to keep old people without pensions or income from losing their homes and starving to death on the street. The taxes were more like insurance premiums anyway. It was never meant to become a retirement fund that allowed you to live the good life, without ever having to sacrifice. Conversely, if at retirement age you have the wealth and don't need it to get by, you shouldn't be able to draw on social security. It was ALWAYS AN INSURANCE POLICY FROM THE BEGINNING, NOT A RETIREMENT FUND!!!

Freedom is what America is all about ...
-Americans should have the freedom to not save for retirement, but those who do save should not have to pay for those who don't via taxes
-The government can not be trusted not tax the saver to pay for the non-savers, so we need to opt for mandatory saving
-Freedom gets stomped on either way, so which is worse ...
--Forcing non-saver to save or forcing saver to pay their way?
--In the end, the non-savers may have more freedom financially during retirement
-It comes down to managing risk after that ... I would vote for 90% of mandatory savings go to TIPS and 10% other to diversify
... freedom is a slippery fish, when politicians get elected by saving people from their mistakes

@Apex,

That's a great idea. The difficulty will be in the transition (if this plan were to ever be initiated). Tranisitioning from a "giant bucket" based plan to individual plans will put a major strain on the "giant bucket".

@Mark C.

You seem to imply by your post that the Medicare portion is very important for all but not the social security.

Do you believe if you have enough money at retirement you also should not be able to get Medicare until your monies are gone? If not why not? Why does this only apply to Social Security. Medicare is insurance too. After all, SS is 12.4% of your wages, Medicare is only 2.9%. If the 12.4% doesn't buy you anything unless you need it, I don't see why the 2.9% should.

On the note of increasing medicare taxes I expect they will raise it. The system is going to run out of money and thats the easiest solution. I am frankly shocked that hasn't already been proposed. Maybe it's because its just a short term solution that doesn't solve the problem. No matter how much you raise it you can't get ahead of it following current trends. Projections (which can definately be way of) currently show Medicare alone consuming the entire US federal budget (20% of the entire nations GDP) by 2075.

There are only two possiblities in the long run, less care or cheaper care. I have not heard anyone propose anything other than cheap promise to cheaper care (pun intended). I hope we get cheaper care eventually but if we don't we are left with the other choice, less care.

Sure, go ahead and make retirement saving mandatory, but it'd work a hell of a lot better if you also mandate an income!

If I had a fucking income (job), one that could support me, I might also be able to save.

Pass all the goddamn laws you want. Sue my sorry ass, then throw it in jail when I can't pay. See if that increases my savings rate.

@Apex:

Of course, you can extend the same logic to Medicare, but as I said, the cost of healthcare is going to far outstrip the benefits of Social Security Retirement payments. If Medicare taxes are raised on par with SSA, then one can assume the plan will remain solvent even with the projected increase in outlays in healthcare. Less Medicare coverage, higher Medicare taxes encourages supplemental private insurance like Medi-Gap, which is the way the system should run. If you want more than basic coverage you have to pay for it. If supplemental coverage is, as one would expect, at lower cost initially than Medicare taxes, even the most modest income earners should be able to afford it, and be able to start paying into it at the beginning of their careers. The theory is that supplemental medical coverage is analagous to having 401k or Roth as supplemental to social security, with premiums deducted on a pre-tax basis to encourage participation. This would differ than HSA, in that the supplemental coverage would be paid into the Medicare trust fund, ensuring its solvency while at the same time offering additional benefits on a higher tier to those with the forethought and sacrifice to pay into it.

I think we need to make saving more appealing.

It's true that many do not save. The conventional idea is to blame the non-savers for this reality, to say that they are stupid or lack willpower or whatever.

Why not blame the people giving the conventional saving advice? It doesn't work, right? Maybe we should try to develop saving advice that works (that actually clicks with large numbers of people).

What is the benefit of saving? Saved dollars buy financial freedom. Just about all of us want more financial freedom. So, yes, we can get people to save if we "sell" the idea properly.

We need some of the smart people who develop commercials aimed at getting us to spend putting work into the task of encouraging us to save instead.

Rob

@Rob

You mean like those "cool" and effective teen anti-smoking campaigns?

I think one thing we should do is start educating kids in school about personal finance. I remember taking basic record keeping in high school but can't remember much about what it entailed. I did not attend college so I don't know if they offer classes in personal finance. I learned everything I know about personal finance through reading books and the internet. That said I am fortunate the I have been with the same employer for 19 yrs who offers a pension plan and 401k after 6 months with a match. Though I learned late about personal finance I will still be able to retire early @ 55. (I'm 44)

Just my thoughts!

How about instead of making it mandatory give people as much incentive to save as possible. With IRA's and 401k's we get taxed either on the front end or the back end. How about no taxes on either end.

You mean like those "cool" and effective teen anti-smoking campaigns?

Yes.

There have been big changes in social attitudes re smoking since I was a boy. When I was a boy, every restaurant permitted smoking. It's not that way today. There are of course still people who smoke. But there is no one today who does not know the downside of smoking. Most smokers have at least tried to quit at some point.

There are always going to be people who manage their money poorly. But, yes, when we get serious about helping people, that will make a difference. Telling people that they lack willpower doesn't get the job done. It's insulting. How do these people keep their jobs if they lack willpower? The idea that the majority of the population is totally lacking in willpower doesn't even make sense.

Yes, I think we should try a new and more positive approach.

Rob

Cherry --

I LOVE that idea!!!! :-)

Require manditory savings - 10% Rule and auto enroll for 401k- 10% min as MANDITORY with no opt out. Raise min. wage to a LIVING WAGE and stop subsidizing big business and give credits to the little start ups.

Win-win-win. You are saving for short term, the 401k is saving for long term, the govt. revenue increase short term due to a LIVING WAGE, and long time when you draw down on your 401k.

As for SS now? If you dont pay in you dont receive. OH LOOK SS is SOLVENT AGAIN. Its that simple

Question:

How much should someone earning minimum wage be required to save for retirement?

How about someone earning minimum wage who has student loan debt and high medical expenses?

Answer:

A person making minimum wage is already required to save for retirement. It's called FICA. There's also Medicare tax that's coming out if they and their employers are following the rules.

A person who earns minimum wage and who has high student loan debt or medical expenses probably has no intention or ability to pay that debt with a monthly payment in excess of inflation. Therefore, he is getting a huge amortized discount on the backs of the taxpayer very early on in life--which is as close to a free ride as he should expect.

?????

I am paying $144 per month on my student loans, out of my minimum wage income.

And I don't see the early-in-life amortized discount - the interest clock starts running shortly after leaving school, and if the borrower defaults, Treasury can easily execute a garnishment on wages and even Social Security, tax refunds, and stimulus payments. (And even that is not free; Treasury charges $17 per garnishment execution, e.g. $17 per paycheck, so either Treasury is making money on the deal, or they are very inefficient.)

I deferred my student loans as long as possible, and now I owe more than I borrowed.

NOW how much should I be required to save for retirement?

p.s. FICA is a bad deal for low earners on average because low earners tend to die early (before reaching minimum wage to collect benefits) and they also have very low marriage rates and therefore leave behind few to collect survivor benefits. It's a better deal for low earners who marry and live long enough to collect, but still is inferior to what they would get from an equivalent stock market investment.

er, that should be "...minimum AGE to collect benefits."

p.s. I don't expect to live to retirement age, so I figure I probably won't get anything for my FICA "contributions."

CherryBlossom said:

"How about instead of making it mandatory give people as much incentive to save as possible. With IRA's and 401k's we get taxed either on the front end or the back end. How about no taxes on either end. "


Other than being highly regressive, it's a great idea!

@Just Curious:

I'm just curious as to why you are making minimum wage after racking up student loan debt? If you're just starting out or were unfortunate to lose your job, I can understand. I'm sorry for your situation, but it does seem fairly unique.

I still think you need to consider what you're getting from student loans on the assumption that going to college pays huge dividends in your career. And as FMF has often stated, your career is your biggest financial impact on your life earnings. Getting low interest loans early on in life, payable over a long period of time in equal payments, uses the power of inflation to reduce the overall cost of debt. It's like a fixed-rate mortgage payment. As your income goes up, the payments become less a percentage of your monthly income. Getting a student loan at 18 years of age, plus the generous payback period, makes them a pretty good deal. The same goes for FICA, Medicare, and any other deferred savings. The earlier you pay into any of these, the more return you get over time, as opposed to waiting to start saving when your 55.

Also, FICA is like insurance. People throughout life pay premiums into the pool, with the expectation that IF they need the benefits they will receive it concurrent with how long they've worked and paid into the system. If you were to get injured and disabled at age 40, you get SSA disability benefits until you retire. That's also a pretty good deal since you end up gettin more than you will have ever paid into the system.

Back to the discussion about whether you should be required to save for retirement. The answer should be YES. Even a very small amount, like 3%, from age 18 until mid-life will pay a huge amount at retirement due to compounding. We all know how irresponsible we were in our early 20's, so when you look back from mid life you'll see things differently. You have to start from the theory, that despite whatever you earn, you can put something aside for savings, even for the price of a few lattes.

I went to college because a degree is required to go to law school.

By the time I graduated, law school had become prohibitively expensive, and I was watching friends get law degrees, pass the bar exam, and take menial jobs while burdened with staggering student loan debt (the law school part of their debt).

So I didn't go to law school and found myself in the Rust Belt at the bottom of a recession with no marketable skills, and took a menial dead-end job (plus add'l menial part-time jobs along the way).

So now I'm old and unskilled and pretty much unemployable.

p.s.

mo income $960

rent (room in house with seven people) $650

student loan garnishment $144

medical exp $110

i live on fumes and food stamps

please tell me what i cut from my spending to meet the savings requirement.

Just, you might want to consider moving to a state with better employment prospects. Are you paying all the $650 a month in rent? Are the seven other people your family or roomates that could hold down jobs of their own? It sounds like a lot for rent for one person to pay. With seven people paying a little a month, you can save over $500 a month. Stop worrying about the student loan and worry about increasing your income. If you're already a smart spender, you'll have plenty left to put in a Roth IRA, even if it's $50 a month.

Unskilled? You went to college and got a degree and you say you're unemployable?? I know the economy sucks right now, especially in the Rust Belt, but it sounds like you gave up too soon just because you wanted to pay off student loan debt. You should have put your career first and worried about getting the job it took to pay the loan off. The government gave you a chance, you didn't take advantage of it, and now they want their money back. There are other jobs other than law that can use someone with a college degree, you just have to work harder to find them, even if it takes moving somewhere else. I hear Wyoming is a good place to start.

Here is another quandary...where do these required savings go? Into the stock market? If that is the case, many people retiring now or in the past year were hammered and lost a lot of money on 'required' savings. I offer not a solution but another wrench for the system.

Also, someone above noted that making savings more appealing...I concur in this. A simple suggestion would be to make the first $500 - 1000 in interest a year tax exempt and promote it heavily. Why? First, most people would never earn that much in interest so it should not actually hurt any sort of revenue stream for the gov and secondly, it would create interest in savings (I think).

As for the basis of your article, as a Libertarian, I would have to vote no. I will not go off on other views here but my question is why would we trust the government to do anything better than the individual could do?

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