How much money is in your 401 (k) or similar DC plan?

[Sheilbh]

What's in the nature of payroll taxes everywhere?

Wrong phrase I suppose, but I mean the normally tied employee and employer taxes that are 'social security' or 'national insurance' or whatever else rather than just the employer section. But it's always levied on different people at different rates. It's always got a wider tax base and is levied at a lower rate.

I thought the logic of collecting more in payroll taxes in the fat years to prepare for the lean Baby Boom years was impeccable.

But it's pay as you go and the rest of the money goes to the government. You collected more to pay current retirees and then to fund the government.

I'd agree with you if there was a national pension fund. During the fat years you collect more and build up a surplus that you'll need to deal with the baby boomers.

[Admiral Yi]

Wrong phrase I suppose, but I mean the normally tied employee and employer taxes that are 'social security' or 'national insurance' or whatever else rather than just the employer section. But it's always levied on different people at different rates. It's always got a wider tax base and is levied at a lower rate.

I still don't know what you mean.  You asked about the effects of throwing Social Security on general revenue.  I answered, then you lost me.

But it's pay as you go and the rest of the money goes to the government. You collected more to pay current retirees and then to fund the government.

I'd agree with you if there was a national pension fund. During the fat years you collect more and build up a surplus that you'll need to deal with the baby boomers.

You pay retirees, fund the government, and create an offsetting liability on the government.

In order for it to work, people had to start thinking of the deficit and debt including the liability to Social Security as the real one.  Which is why i asked the question about which one gets reported.

[Sheilbh]

I still don't know what you mean.  You asked about the effects of throwing Social Security on general revenue.  I answered, then you lost me.

Well okay. Let's go back to your answer. I probably didn't understand it.

In order for it to work, people had to start thinking of the deficit and debt including the liability to Social Security as the real one.  Which is why i asked the question about which one gets reported.

I think it works because of the promise and the political impossibility of getting rid of it.

As it is I think it works quite inefficiently and if people stopped talking about 'trust funds' and 'raiding the surplus' you'd have a better chance of creating a more efficient way of funding pensions.

[Admiral Yi]

Well okay. Let's go back to your answer. I probably didn't understand it.

If you keep the funding payroll taxes, then everyone with earned income pays for it.  If you fund it out of income taxes, then the 53% of the working population that pays income taxes pays for it.

I think it works because of the promise and the political impossibility of getting rid of it.

As it is I think it works quite inefficiently and if people stopped talking about 'trust funds' and 'raiding the surplus' you'd have a better chance of creating a more efficient way of funding pensions.

Of the three alternatives, they are in descending order of attractiveness:

1. Run a surplus and put it in a sovereign wealth fund.

2. Run a surplus and put it in an Algore box.

3. Don't do anything.

[Sheilbh]

If you keep the funding payroll taxes, then everyone with earned income pays for it.  If you fund it out of income taxes, then the 53% of the working population that pays income taxes pays for it.

Okay. General revenue includes all taxes. The 53% who pay income tax pay for it. So do the 19% who smoke.

Other systems fund their social security out of general revenue, but have a separate 'national insurance'/payroll/'social security' tax which contributes to general revenue like all the other taxes. I think that everyone pays for it is a benefit, but the real boon seems to me that it enables a contribution based welfare state.

But I don't think that's a significant difference or somehow impossible if it's funded from general revenue.

Of the three alternatives, they are in descending order of attractiveness:

1. Run a surplus and put it in a sovereign wealth fund.

2. Run a surplus and put it in an Algore box.

3. Don't do anything.

There's lots of options for pension funding and the structure of the system. It's an area where almost every developed country's been reforming significantly for the best part of twenty years. So there's loads of different models to look at.

[DGuller]

Some people equate this to the trust fund being "stolen" or "used up." In some ways it's just government accounting tricks, but where it's sadly unfortunate is it means we really see virtually no return on the nominal amount in the trust fund because historically treasury bonds barely beat inflation. If we could take that money and instead create a SWF we could actually have grown it over time and who knows where it'd put us now. If a country like Norway can amass a SWF of $700bn I like to think ours would be immense. The nominal amount in the SSTF is like $2.8 trillion, and if it had been properly invested since the 30s it would have been immensely larger.

Would it really be?  The entire S&P market cap is $15 trillion.  Forget GM, forget Bernanke, the government would own the majority of US equity market if it got decent returns.  I don't know what the implications of that would be, but they would be pretty weird.  And what if Jimmy Hoffa or Allen Dorfman get a political appointment to head that SWF?

[OttoVonBismarck]

Sheilbh, you understand the term "Social Security Trust Fund" is spelled out in statute. People aren't making this up. Now, functionally you have the right of it but this Trust Fund isn't something pundits made up. The theory has always been that the Social Security tax was a special payroll tax that had a "directed purpose." That differentiates it from income tax and sales tax or similar that just go into the government coffers and that are subject to regular budgeting.

The way social security taxes, as per statute, are supposed to be spent is to 1) pay current beneficiaries their entitlement and 2) buy treasury securities with the surplus. That surplus of securities has to be considered as something because it represents something that legally, the Social Security Trust Fund owns. The government has to pay those bonds back just the same way it does bonds you or I hold. Yi was right to correct me before, it's not so much that the excess go into "general revenue" but instead that they are deficit dollars that go into "general spending."

[Jacob]

In the Canadian context it looks like there is a similar problem with RRSPs being insufficient to provide decent retirement for significant proportions of the population. The number being bandied around right now is that about half of people over 40 are looking at "a significant decrease in their standard of living" on retirement.

It looks like they're talking about expanding CPP (and QPP), but perhaps not enough to do make a big difference.

One - somewhat more drastic - proposal is to increase the amount of pensionable earnings (double it, basically), push retirement back to 68 or even 70, AND accept that benefits can be paid out even if the plan isn't fully funded (because otherwise it'll be five decades or so before it can really take effect).

Summaries here, for those who are interested:
http://www.irpp.org/en/research/faces-of-aging/not-so-modest-reforms/
http://www.benefitscanada.com/pensions/governance-law/%E2%80%9Cgrand-bargain%E2%80%9D-needed-for-cqpp-reform-41455?utm_source=EmailMarketing&utm_medium=email&utm_campaign=Daily_Newsletter

[Savonarola]

A number of the articles posted here paint a pretty bleak picture of a future where the elderly have no savings.  Just out of curiosity has anyone changed, or made plans to change their amount they contribute to their DC plan?

[Baron von Schtinkenbutt]

Barring unforeseen negative events, I plan to ratchet my contributions up to the before-tax maximum over the next year, and have my wife do the same.  At that point, I may start contributing to an IRA after-tax.

[Admiral Yi]

I'm happier putting my money in an IRA then into a taxable brokerage account than I am in putting it into a 401k without match because of management fees and my puny effective tax rate.

[Admiral Yi]

Oh right, and employee stock purchase.

[Baron von Schtinkenbutt]

I'm happier putting my money in an IRA then into a taxable brokerage account than I am in putting it into a 401k without match because of management fees and my puny effective tax rate.

I must be lucky, because neither of my 401k accounts has any management fees beyond the fund expense ratios.

[Admiral Yi]

I must be lucky, because neither of my 401k accounts has any management fees beyond the fund expense ratios.

That's what I'm talking about.  I'm not crazy about giving away 1.5-2% of principal every year to some schmucks who get beaten regularly by monkeys with darts.

[Maximus]

Where do they have monkeys beating people with darts and is it open to spectators?