Fiscal cliff - could be worse


by Astronuc
Tags: cliff, fiscal, worse
jim mcnamara
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Nov16-12, 10:07 AM
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ImaLooser said:
Many companies force retirement at age 65.
Really?

In the US, so my HR people tell me, there are very stringent legal requirements around forcing people to retire after a certain age. Can you please cite a source for this?

What is often done is to enforce some medical examination requirements starting from day one of employment. But the employee knows he/she cannot develop some medical conditions and still be a licensed commerical airline pilot, for example. That does not seem to be what you implied.
BobG
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Nov16-12, 01:13 PM
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Many is an ambiguous term. If there's many, many, many companies, then what does many companies mean?

Until 1978, the minimum mandatory retirement age was 65, per federal law (with many exceptions for occupations such as firefighter, law enforcement, etc).

In 1978, the minimum mandatory retirement age was raised to 70 (with many exceptions for occupations).

In 1986, minimum mandatory retirement ages were abolished completely (with many exceptions for occupations).

Because of the exceptions, many occupations do have mandatory retirement ages and many are lower than 65. For example, air traffic controllers have to retire at age 56. FIFA referees have to retire at 45 (at least from FIFA level competitions, such as the World Cup, and the highest professional leagues - they can still referee lower levels, so it's more a mandatory demotion age).

Culturally, many people do still envision 65 being the retirement age (regardless of the fact that SSA has already raised the minimum age to receive full benefits - a person can still receive reduced benefits earlier).
russ_watters
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Nov16-12, 01:27 PM
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Quote Quote by CAC1001 View Post
We could means-test it.
How far would you go with that? That's a vastly different concept than what we have now. For a lot of people, it would mean paying them a lot more than they are otherwise due under the current structure and for a lot of people, paying them a lot less. It is a complete change in the nature of the program.
If it's supposed to be a "receive what you paid in" type of program...
It is supposed to be a "receive 5x what you paid in"(roughly) type of program -- like a 401k.
....that is why the amount of income that is subject to the payrol tax is capped.
Not really -- it would be just as easy to not cap either the tax or the benefits. The only logic I can think of for the cap is at the cap, it provides a pretty decent retirement lifestyle. Anything above that doesn't really require government to force you to save for.
Raising the cap and capping the benefits isn't so much to make it "fair," just to make it where we have a form of old-age social insurance program if you will, that provides people who need it with a minimum form of income in old age.
Well, fine, but I think that because most people thought that they were saving through this program for their entire lives for an income in retirement that was well above sustenance, it would be a huge shaft to suddenly slash their benefits like that. I strongly disagree with cutting people off at the knee like that.
I am all for private retirement accounts, however sometimes those can have a blowup, for example people who saved and invested prudently for years, then lost it all in the crash... [emphasis added]
That statement is self-contradictory. It isn't possible to "lose it all" if you are investing prudently. The most popular moderately safe growth investment is the S&P 500 Index Fund, which if all of your money was invested in (not prudent), would have lost half its value in the recent crash. This, of course, was temporary, recovering all but about 12% of it in two years. That's as bad as it ever gets and if you broaden your time horizon, you'll see that since 1995, investors have realized gains of 310%, even if we include the crash. So unless someone did something really, really stupid, the typical investment has paid off like a gold mine.
..or fell for one of the Bernie Madoffs of the world, and so forth.
Most of the investors of Madoff:
1. Started off rich.
2. Should have known better.

So that is not a typical situation.
When you say "ratio," do you mean the amount of people paying into it for each beneficiary today versus decades ago?
No, I mean the amount of money I'm going to get from Social Security versus the amount of money I paid in. Right now, even if the program survives unchanged, I won't get back what I paid in. That represents an 80% loss when compared to a moderately successful private retirement account. That's an enormous failure.
BobG
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Nov16-12, 01:42 PM
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Quote Quote by russ_watters View Post
It isn't possible to "lose it all" if you are investing prudently. The most popular moderately safe growth investment is the S&P 500 Index Fund, which if all of your money was invested in (not prudent), would have lost half its value. This, of course, was temporary, recovering all but about 12% of it in two years. That's as bad as it ever gets and if you broaden your time horizon, you'll see that since 1995, investors have realized gains of 310%, even if we include the crash. So unless someone did something really, really stupid, the typical investment has paid off like a gold mine.
Just one caveat. As long as you haven't retired yet and are still investing money instead of pulling it out, then what you say is true (in fact, the crash is great because, for a period of time, the new money you were putting in was sure to get a fantastic return).

If you're already retired, the crash is devestating, since your living expenses don't go down temporarily. You're pulling out the same amount of money, but it's now a bigger percentage of your total investment.

Of course, if your life expetancy means you'll be relying on your investments for a long period of time, you ought to expect that stocks will be down during at least a portion of that time - but it'd be hard to plan for a few years where your investments lost half their value.

That's called risk. With a capital R.
russ_watters
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Nov16-12, 03:38 PM
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Quote Quote by BobG View Post
Just one caveat. As long as you haven't retired yet and are still investing money instead of pulling it out, then what you say is true (in fact, the crash is great because, for a period of time, the new money you were putting in was sure to get a fantastic return).

If you're already retired, the crash is devestating, since your living expenses don't go down temporarily. You're pulling out the same amount of money, but it's now a bigger percentage of your total investment.
"Devistating" is awfully strong: we're talking about two years of double the drawdown on a 30 year expected lifespan. Even if there is no accompanying excessive growth (and there was, of course) and the person took all of their money out at once, at the worst possible time, that would only cause a 7% drop in retirement income if the loss was spread over the whole retirement.

Heck, the effect of taking the money out and missing out on the next 30 years of gains would be much worse than the crash itself!
Of course, if your life expetancy means you'll be relying on your investments for a long period of time, you ought to expect that stocks will be down during at least a portion of that time - but it'd be hard to plan for a few years where your investments lost half their value.
What? No its not! if you're investing for 30 years, the best way to plan for the time your investment loses half of its value is via a pre-determined stock to fixed income ratio and completely ignoring the movement of the market. Over that much time, the crash will fix itself if you don't do anything to make it worse. That's like rule #2 of investing: Ride it out, don't touch it; you'll just make it worse if you try to outsmart the market.

Or, more realistically: before the crash, as long as you didn't start buying extra Corvettes because your nest-egg was double what you expected it to be, the crash just brought it back down to where you expected it to be.
CAC1001
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Nov16-12, 07:09 PM
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Quote Quote by russ_watters View Post
How far would you go with that? That's a vastly different concept than what we have now. For a lot of people, it would mean paying them a lot more than they are otherwise due under the current structure and for a lot of people, paying them a lot less. It is a complete change in the nature of the program.
Well not all of a sudden, but we could implement it gradually. Or, gradually fade out regular social Security, then replace it with something new that functions in the way I described.

It is supposed to be a "receive 5x what you paid in"(roughly) type of program -- like a 401k.
My understanding was that it is supposed to be a program where you get paid out what you paid in.

Not really -- it would be just as easy to not cap either the tax or the benefits. The only logic I can think of for the cap is at the cap, it provides a pretty decent retirement lifestyle. Anything above that doesn't really require government to force you to save for.
Well functionally, having no cap on the tax or benefits would work fine, but then you'd get rich people getting massive payouts made to them, which wouldn't go over too well with many of the lower earners in the population who don't understand how the program is supposed to work.

Well, fine, but I think that because most people thought that they were saving through this program for their entire lives for an income in retirement that was well above sustenance, it would be a huge shaft to suddenly slash their benefits like that. I strongly disagree with cutting people off at the knee like that.
Yes, I understand that. That's why I'd be for implementing it gradually. Also, maybe there could be a way to shore it up but make it where it provides more than enough for just basic sustenance for most people?

That statement is self-contradictory. It isn't possible to "lose it all" if you are investing prudently. The most popular moderately safe growth investment is the S&P 500 Index Fund, which if all of your money was invested in (not prudent), would have lost half its value in the recent crash. This, of course, was temporary, recovering all but about 12% of it in two years. That's as bad as it ever gets and if you broaden your time horizon, you'll see that since 1995, investors have realized gains of 310%, even if we include the crash. So unless someone did something really, really stupid, the typical investment has paid off like a gold mine. Most of the investors of Madoff:

1. Started off rich.
2. Should have known better.

So that is not a typical situation.
True, but unfortunately, a lot of people don't know all of this. The average person is pretty clueless regarding the subject of investing.
Astronuc
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Nov21-12, 09:46 PM
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Here's an interesting perspective: 5 reasons to let the U.S. ride over the fiscal cliff
http://theweek.com/article/index/236...e-fiscal-cliff

What's a viable alternative?
russ_watters
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Nov22-12, 12:48 AM
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Quote Quote by CAC1001 View Post
My understanding was that it is supposed to be a program where you get paid out what you paid in.
Why would anyone ever support a retirement savings program that returned them nothing more than they could have gotten by stuffing their cash under a mattress?

No, throughout its history, it has paid people vastly more than they paid-in: which is as any retirement investment plan is supposed to work. But it doesn't anymore. http://www.urban.org/UploadedPDF/412...a-Lifetime.pdf

-If you retired in 1960 it paid you 6.3x what you paid-in.
-If you retired in 1980 it paid you 2.1x what you paid-in.
-If you retired in 2010 it is estimated that it will pay you 0.9x what you paid in.

(for single male earners, adjusted for inflation)

That is a travesty. We've been screwed-over by older generations and most people don't even know it.
True, but unfortunately, a lot of people don't know all of this. The average person is pretty clueless regarding the subject of investing.
Ok....but that fact doesn't make what you said before true. It may be true that people think it is common for people to "lose it all", but it isn't. Much less if they are investing "prudently".

It takes spectacular stupidity or bad luck to permanently lose a large fraction of your retirement savings due to a stock market crash. And if you are investing "prudently", it is all but impossible.

"Prudent" investing really is easy:

First, a certain fraction of your investments will be in insured, fixed-income securities. Those are basically a guaranteed return and near zero chance of losing your principal (barring an asteroid strike or nuclear war).

Next, just put all of your non-fixed income investments into an S&P500 Index Fund (it is the most popular fund there is). Never in its history has it been a losing proposition over a timeframe of more than 15 years. It is so good that 'getting back what you paid in' would be considered a significant failure. The baseline for determining success/failure would be somewhere around a 4:1 return.
Astronuc
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Nov22-12, 06:50 AM
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Some history on social security and Medicare:

http://www.ssa.gov/history/hfaq.html
http://www.ssa.gov/history/briefhistory3.html
http://www.ssa.gov/history/

Quote Quote by ssa.gov
From 1937 until 1940, Social Security paid benefits in the form of a single, lump-sum payment. The purpose of these one-time payments was to provide some "payback" to those people who contributed to the program but would not participate long enough to be vested for monthly benefits. Under the 1935 law, monthly benefits were to begin in 1942, with the period 1937-1942 used both to build up the Trust Funds and to provide a minimum period for participation in order to qualify for monthly benefits.
http://www.ssa.gov/history/briefhist...tml#firstcheck

Quote Quote by ssa.gov
"Long before the economic blight of the depression descended on the Nation, millions of our people were living in wastelands of want and fear. Men and women too old and infirm to work either depended on those who had but little to share, or spent their remaining years within the walls of a poorhouse . . .The Social Security Act offers to all our citizens a workable and working method of meeting urgent present needs and of forestalling future need . . . One word of warning, however. In our efforts to provide security for all of the American people, let us not allow ourselves to be misled by those who advocate short cuts to Utopia or fantastic financial schemes. We have come a long way. But we still have a long way to go. There is still today a frontier that remains unconquered--an America unclaimed. This is the great, the nationwide frontier of insecurity, of human want and fear. This is the frontier--the America--we have set ourselves to reclaim." -- President Franklin Roosevelt August 14, 1938, Radio address on the third anniversary of the Social Security Act
Nice idea back then, and the US still had room to grow. Hawaii and Alaska were not yet states.

Quote Quote by ssa.gov
Ida May Fuller worked for three years under the Social Security program. The accumulated taxes on her salary during those three years was a total of $24.75. Her initial monthly check was $22.54. During her lifetime she collected a total of $22,888.92 in Social Security benefits.
http://www.ssa.gov/history/briefhistory3.html#idamay

Fuller would be an extreme case, since most folk don't live to 100. Nevertheless, many of the first recipients paid in a lot less than they received.
BobG
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Nov22-12, 08:28 AM
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Quote Quote by Astronuc View Post
Here's an interesting perspective: 5 reasons to let the U.S. ride over the fiscal cliff
http://theweek.com/article/index/236...e-fiscal-cliff

What's a viable alternative?
About the only thing I disagree with is the possibility of the fiscal cliff causing credit angencies to downgrade the US. Doing nothing will cause them to downgrade the US. Cutting the budget deficit (however it's done) will improve confidence with credit agencies.

Plus, the article omits the impact on unemployment completely. I think sending unemployment rates right back up (which will increase government expenditures for unemployment, etc) would be the biggest negative of hitting the fiscal cliff.

And, personally, I wouldn't like to see such drastic cuts in defense spending.
SixNein
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Nov22-12, 03:32 PM
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Quote Quote by russ_watters View Post
That is a travesty. We've been screwed-over by older generations and most people don't even know it.
To be fair, the health-care benefits being received more than make up for the SSI losses.
SixNein
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Nov22-12, 03:53 PM
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Quote Quote by russ_watters View Post
Why would anyone ever support a retirement savings program that returned them nothing more than they could have gotten by stuffing their cash under a mattress?

No, throughout its history, it has paid people vastly more than they paid-in: which is as any retirement investment plan is supposed to work. But it doesn't anymore. http://www.urban.org/UploadedPDF/412...a-Lifetime.pdf

-If you retired in 1960 it paid you 6.3x what you paid-in.
-If you retired in 1980 it paid you 2.1x what you paid-in.
-If you retired in 2010 it is estimated that it will pay you 0.9x what you paid in.

(for single male earners, adjusted for inflation)

That is a travesty. We've been screwed-over by older generations and most people don't even know it. Ok....but that fact doesn't make what you said before true. It may be true that people think it is common for people to "lose it all", but it isn't. Much less if they are investing "prudently".

It takes spectacular stupidity or bad luck to permanently lose a large fraction of your retirement savings due to a stock market crash. And if you are investing "prudently", it is all but impossible.

"Prudent" investing really is easy:

First, a certain fraction of your investments will be in insured, fixed-income securities. Those are basically a guaranteed return and near zero chance of losing your principal (barring an asteroid strike or nuclear war).

Next, just put all of your non-fixed income investments into an S&P500 Index Fund (it is the most popular fund there is). Never in its history has it been a losing proposition over a timeframe of more than 15 years. It is so good that 'getting back what you paid in' would be considered a significant failure. The baseline for determining success/failure would be somewhere around a 4:1 return.
One of the goals was to protect people's money from inflation. So if you paid in 10 dollars in 1960, you should get that money back in terms of 2012 dollars. Hence why SSI is adjusted by the CPI. Now, there are problems with the CPI. Perhaps the largest problem is overestimation of inflation. Due to over-estimation, people could make a profit in terms of real dollars.So it should come at no surprise to anyone that putting government stuff on the chained CPI is probably going to happen sooner rather than later. But it also goes a long way to fixing the growth rates on these programs.

Social security isn't a bad program, and it can be fixed with modest adjustments. As I've said all along, the real challenge is health-care and military spending. And health-care is probably the most challenging of the two.
russ_watters
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Nov22-12, 06:38 PM
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Quote Quote by SixNein View Post
To be fair, the health-care benefits being received more than make up for the SSI losses.
Received by who? I'm 36.

Regardless, I'm not a hypocrite: Having a steeper trajectory of unfunded promises is not something that makes me happy. It will just be even worse when that blows up in our faces. We're just making that charade last longer.
edward
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Nov22-12, 07:39 PM
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Quote Quote by russ_watters View Post
Received by who? I'm 36.

Regardless, I'm not a hypocrite: Having a steeper trajectory of unfunded promises is not something that makes me happy. It will just be even worse when that blows up in our faces. We're just making that charade last longer.
A bit off topic

I just crunched some numbers on various retirement calculators. They all seem to presume that there will be either a company pension or Social Security at retirement age. For younger people that just isn't realistic. Anyone under forty is younger people to me.

http://cgi.money.cnn.com/tools/retir...entplanner.jsp
SixNein
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Nov23-12, 09:00 PM
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Quote Quote by russ_watters View Post
Received by who? I'm 36.

Regardless, I'm not a hypocrite: Having a steeper trajectory of unfunded promises is not something that makes me happy. It will just be even worse when that blows up in our faces. We're just making that charade last longer.
The IMF projected that everyone alive right now would come out ahead, but the rewards are greater at the upper age spans. At the same time, I think it's important to point out that projections on a macroeconomic level so far out aren't very good. The same is true of the projections of our federal budget. When someone says that SSI is projected to be insolvent by 2036, what is often left out is the great uncertainties involved in making such a long term projection. For example, we were running a surplus a decade ago, and the views then and today have changed dramatically.

My main concern about our economic future is our political culture. I think our political culture can tell us more about where we are going than any long term macroeconomic projection based on countless assumptions. For example, consider the comments by Marco Rubio (one of those people being primed for a potential presidential run):

GQ: How old do you think the Earth is?
Marco Rubio: I'm not a scientist, man. I can tell you what recorded history says, I can tell you what the Bible says, but I think that's a dispute amongst theologians and I think it has nothing to do with the gross domestic product or economic growth of the United States. I think the age of the universe has zero to do with how our economy is going to grow. I'm not a scientist. I don't think I'm qualified to answer a question like that. At the end of the day, I think there are multiple theories out there on how the universe was created and I think this is a country where people should have the opportunity to teach them all. I think parents should be able to teach their kids what their faith says, what science says. Whether the Earth was created in 7 days, or 7 actual eras, I'm not sure we'll ever be able to answer that. It's one of the great mysteries.
Read More http://www.gq.com/news-politics/poli...#ixzz2D6RBBC9f

I think it's reasonable to say that their is a growing intolerance to science in our political culture. Just this past year, we watched people doubt the statistics behind polling, unemployment numbers, and so forth. The same is taking place of evolution, climate change, stem cell research, nuclear technology, and even the space program seems to be viewed as nothing more than special interest. Even in economic fronts, this trend endures. For example, the CRS recently posted a study showing that there exists no evidence that tax cuts for the wealthy leads to economic growth. Republicans responded by suppressing the report. And there exists many more examples outside of that one report covering both parties.

In a basic nutshell, the problems we face are a lot bigger and deeper than spending on SSI. Quite frankly, SSI isn't a real big problem. It's undergoing some strain due to our population dynamics, but it's not something a practical hand couldn't fix. For example, the chained CPI would actually make it grow slower since it cuts out some of the overestimation of inflation. It would also help put a stop to people making money in real terms off of the SSI program. Little adjustments like these can take care of SSI.

Health-care is a different animal altogether. The first obvious problem is the health-care industry is being protected by the government from open markets. And there is enormous amounts of money and politics involved in the industry. So even very tiny changes in the industry will come with a very big fight. A fight that can end political careers very quickly since the elderly is one of the most reliable voters in America. It's a mess and nobody in congress is really willing to touch it. In fact, the problem is getting worse every election cycle. And add that to the political culture above, and it's a disaster waiting to happen.
Astronuc
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Nov24-12, 01:30 PM
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Chambliss latest Republican to break with anti-tax lobbyist
http://news.yahoo.com/chambliss-late...195247900.html

What will work? What are the consequences?

Spending cuts? How much and what?

Tax increases? How much and what?

Revenue increases? How and what?
Angry Citizen
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Nov24-12, 02:44 PM
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Quote Quote by Astronuc View Post
Chambliss latest Republican to break with anti-tax lobbyist
http://news.yahoo.com/chambliss-late...195247900.html

What will work? What are the consequences?

Spending cuts? How much and what?

Tax increases? How much and what?

Revenue increases? How and what?
You forgot something: Stimulus spending. If we had something like the American Jobs Act in place a couple years ago, our deficit would be lower because more people would be paying taxes, and some would be paying higher taxes.

A sizable share of our deficit is revenue loss due to the Bush recession. Making up that revenue loss requires an end to the lingering effects of the Bush recession. Keynesian economics dictates that targeted spending increases, not decreases, are key to this.
JonDE
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Nov24-12, 06:35 PM
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Quote Quote by Angry Citizen View Post
You forgot something: Stimulus spending. If we had something like the American Jobs Act in place a couple years ago, our deficit would be lower because more people would be paying taxes, and some would be paying higher taxes.

A sizable share of our deficit is revenue loss due to the Bush recession. Making up that revenue loss requires an end to the lingering effects of the Bush recession. Keynesian economics dictates that targeted spending increases, not decreases, are key to this.
We are beyond that point now. The goal now is to immediately shrink the deficit while still allowing the economy to grow. There will most likely be very little stimulus in any form from here on out. IMO stimulus would help the economy to grow but in the short term would lead to bigger deficits, this is not the goal from what I have seen.


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