help me out here

if the $ are in the social security system they are not considered savings but if they are in an account which creates business for life insurance companies they are considered savings and since "economists" favor finding ways to induce eople to save we should favor opt-in accounts

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james oneill | 05.22.05 - 8:05 am | #

Very thoughtful post.

But I think the whole issue requires some definition. Most people would agree that increasing national savings is a good thing, but the degree to which you move savings gap to savings crisis depends in large part of your forecast of national and personal deficits going forwards. For an example if you tweak a couple of economic and demographic assumptions Trust Fund deficits and so demands on the unified national budget turn into Trust Fund surpluses that represent a low cost borrowing source for the rest of government.

And this same sort of calculation works for workers. Whether the 12.4% of payroll (6.2% direct from your paycheck) represents the right level of personal savings is determined to a great degree by whether you assume 100% or 76% of scheduled benefits in 2041.

On the narrow question of opt-in/opt-out I favor opt-out because in my personal economic situation I probably should be in and to the maximums. I am just too lazy. But I am not sure what relevance all of this has for the working poor. Do we require all employers to offer 401ks even to the shortest term part time employee? How would we even begin to handle portability?

But to revert to my main point Social Security solvency is the black hole that is distorting the whole space-time-economics continuum. Take one set of assumptions and twenty somethings who are relying on Social Security as their main source of retirement income and defering investing in alternative savings vehicles are idiots. Take another set of assumptions and those same people who are assuming 100% of a better benefit than retirees get today and are relying on that plus whatever they can save once the kids are out of the house can justify funding piano lessons for littly Janey rather than socking it away in a 401k.

Until and unless we reach some sort of realistic consensus on Social Security solvency discussions on opt-in/opt-out are to some degree a waste of time. Low Cost has tractor beams locked onto Intermediate Cost and at some point over the next ten months they are likely to merge. When the models collide there will be all kinds of sparks thrown off, some political, many economic and we can return to this discussion with a whole new paradigm.

(BTW, I have actually read Kuhn, I am using "paradigm" exactly as Structure of Scientific Revolutions does. Accepting Social Security solvency is almost as transformative as accepting Helio-Centrism or Relativity, the whole political-economic landscape reshapes itself in radical ways.)
Bruce Webb | Homepage | 05.22.05 - 8:41 am | #

James:

I think Mark's point is do we understand what is driving low savings? Is it simply people are too lazy to get started? His contention is that if we do not understand the problem, then designing a policy to fix a problem we don't understand is bound to fail.

For a cynical me it is the phrase, "creates business for life insurance companies" that gives me pause. Are we designing a program that has the life insurance companies best interest in mind or the general public's interests in mind? We need only look at the Medicare perscription drug bill for an example where policy was mis-formed to benefit big Pharma.
cl | Homepage | 05.22.05 - 10:22 am | #

cl

The answer to your question is "Yes". You combine clawback and required annuity and measure them against calling the Trustees bluff and simply accepting the 1.92% payroll tax hit required under the standard Intermediate Cost alternative to fully fund Social Security at 100% of scheduled benefits and there is no mathematical way to get a better deal out of private accounts. It is all about Wall Street skimming commissions of a collective cash stream that measures in the $trillions.

A worker who enters the work force at $25,000 and stays at that level for fifty years would be faced with a tax increase of 1.92% of $25,000 x 50 years which equals $24,000 lifetime, or $480 a year, or $40 a month. (This isn't a standard wage history but it is a lot more common than a lot of people would think. Ask that 55 year old waitress at the diner or the 60 year old hotel maid.)

When faced with these numbers the choice is crystal clear, for lower income workers the worse case scenario of funding the entire shortfall through taxes is pretty cheap compared to any plan that combines benefit cuts, private accounts, clawbacks and annuities. They get 100% security for $1.33/day.

Private accounts fare better as you move up the income ladder towards the cap but fare worse depending on how close you are to retirement age. But there are few wage histories where taking the 1.92% payroll hit would not give a better benefit/cost ratio than any system of private accounts. And that hit actually decreases in any year the economy grows more than 2%.

Bush took tax increases off the table right from the outset not because he was a friend of the working poor, but because he does not want anyone to perform these kind of calculations.

Too bad for him that I have all this spare time on my hands.
Bruce Webb | Homepage | 05.22.05 - 11:32 am | #

From a purely policy perspective this "new legislation" won't really do much. Under current 401(k) law the plan sponsor can set up their plans as either opt-in or opt-out, and there are pretty specific guidelines as to the sorts of default funds that can be used. The main reason that opt-out increases participation (and any Corporate Trust officer will tell you it does) is that people simple forget about it, and don't think about it. Over a long time-horizon that might change if all plans are forced to become opt-out, but many companies already have opt-out plans which seem to have higher participation rates than their opt-in counterparts.

I'm not very sold on the annuities piece, because a lot of companies have recently had problems with their definied-benefit plans, but I'd have to know more about that sort of thing to really have much more of an opinion than a gut-level nervousness. The other question is what if I don't want my 401(k) to become an annuity when I retire, but I want to participate in the plan? Would the new law allow my employer to convert my balance to an annuity without my consent? And wouldn't that place fiduciaries in a basically impossible spot, as they aren't allowed to make changes to 401(k) allocations without participant consent under ERISA? All the currently existing regulatory schema for employer-sponsored retirement plans certainly add a few wrinkles to the annuity idea.

But, aside from the annuity portion, the mandated opt-out isn't that huge a change. I'm not sure it's something the government should persue, but from a practical perspective it isn't that big a deal.
Timothy | Homepage | 05.23.05 - 9:59 am | #

The answer to your question is "Yes". You combine clawback and required annuity and measure them against calling the Trustees bluff and simply accepting the 1.92% payroll tax hit required under the standard Intermediate diazepam Cost alternative to fully fund Social Security at 100% of scheduled benefits and there is no mathematical way to get a better deal out of private accounts. It is all about Wall Street skimming commissions of a collective cash stream that measures in the $trillions.
Elsa | Homepage | 02.17.06 - 11:04 am | #