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I wrote this for my blog and will use it in the future, but I thought HD was a good place to get feedback.
First we eliminate all existing retirement vehicles – 401k, 403b, IRA, Roth , etc. all terminated, no longer permitted.
They are replaced with one standard plan whether employer-based or not. One set of limits, rules and regulations. All contributions on an after-tax basis. All earnings tax-free upon withdrawal but not before age 55 or disability. Voluntary employer contributions permitted, taxed as ordinary income upon distribution.
Social Security
Increase the payroll tax from 6.2% to 10% on employers only.
Social Security will be solvent over the next 75 years, but 20% of the gap between spending and revenue remains in the 75th year, meaning the program is not yet sustainable. Apply adjustments to funding gradually to assure sustainability by the 75th year. I used the CRFB modeling tool
Possible consequences
Employers may attempt to adjust future wages, some may modify retirement benefit contributions, [but employers will still need to compete for workers] there may be some minor price adjustments, some minor stock market impact, but so what, all of it will eventually be absorbed into the economy. A transition period. I would simply allow transfer of all existing funds into the new plan. There may also be room for improvements in the Social Security formula.
The benefits are obvious
The greater ability to retire, increased net retirement income, less administrative complexity and cost, a more mobile workforce especially at older ages, increased sustainable buying power among retirees.
Now all we have to do is convince every employer in America, 340 million people and the ideologues in Congress.
Many years ago someone (who I can’t remember) proposed the Universal Savings Account (USA). It was such a good I could never forget it.
Any plan that would mandate a reasonable required contribution (15-20%) and benefit should be based on defined contribution should work. The defined benefit plan should be eliminated. But to tell the true, you can talk or discuss as much as you want, but the way the US government works, with so many people just looking after themself, the system would never change. We just created another “Trump” accounts for selected kids born within next few years or have parent with income less than a set amount. So …
I doubt you would say that if you were retired and every month your pension was deposited in your bank account. Actually we would all be better off if defined benefit pensions were universal, but is never happening.
Only about 15% of the private workforce has one these days.
Both me and my wife retired from State. My wife retired more than 12 years ago from State with a pension of 60K/year for life plus full medical benefit. She took another job with the county (define contribution plan) and qualify for another retirement check from the county when she choose to retire. I got a check from State when I turn 60 more than 4 years ago for working with the state first 13 years after college. (State also will pay for my secondary medical insurance when I am qualify for Medicare.) When I first work with the State we only contribute 3% of our salary, now it is almost 10% (mandatory). Even we are the beneficial of define benefit plan, I do not think it is feasible for the future of the country. The insurance cost by itself almost more than 1K/month per retiree. (I remembered back in 1985, insurance are so cheap that most employer cover 100% premium, co-pay for doctor is $5, brand name $10). I do not remember the exact number, but I think my retirement account balance is less than 35K when I left, but I get a check for 1.6K for life when I turned 60. That make no financial sense.
I think there is alot to like here. I would add that we need to eliminate public pensions to the mix. Everyone, public and private, on the same program.
The public pension, some still incredibly generous, is the result of the alliance between public unions and politicians and the belief there was a trade off between pay in the private sector and benefits in the public. Everyone seemed to forget taxpayers were footing the bill. States and taxpayers would be better off if both pay and benefits were aligned with the private sector.
I am sure HD readers have heard about this plan.
The administration is eyeing Australia’s superannuation model as a potential method for the U.S.
I think it worth noting that Australia started with a 3% contribution in 1983, which has gradually and steadily increased, only reaching 12% this year. So there was not the political shock that suddenly launching to 12% would have caused.
Australia is also a very compliant society (from my sister who is a political science researcher at Australian National University) so we tend to not have passionate arguments about something like our superannuation scheme. It has just become an accepted part of the employee / employer arrangement.
It has also been asked about “who pays?”. On the surface, it looks like the employer pays. Someone who is paid $100,000 salary gets $12,000 paid into their superannuation by their employer. But I suspect that the superannuation system has exerted downward pressure on wages over time, so that in the absence of superannuation that person’s wage would likely have been slightly higher. So I think that the superannuation payment is really some split between employer contribution and foregone wages that might have existed otherwise.
Either way, this is not a point of contention in Australia, it is just seen as part of the deal.
I have read this with great interest, how would superannuation work for spouses that don’t or haven’t worked (since there is no employer contribution). Social security offers spousal benefits in these cases.
I’m not sure if I understand spousal benefits, so apologies if my response misses the mark.
With Australia’s superannuation, your account balance is all yours. If you pass away, all your superannuation will go to your nominated beneficiary (typically your spouse if married). So for people with larger superannuation balances, it is expected that these will become an inheritance to the next generation.
If for some reason you have not worked and aren’t married or in a similar relationship, then there is the safety net of an aged pension.
Right. We need to keep in mind, the fact that SS is insurance that protects the spouse and kids, as well as the earning ability of the individual.
Greg, thanks for chiming in on this subject. You make a great point about forgone wages; a pie is only so big, you can slice the pie up any way you wish, but it’s not getting any larger.
Fringe benefits come in lieu of wages; pragmatism suggests we should give much thought to how to make the best of what is on the table.
I like what I have heard about superannuation, and have a question. Once you retire, are there reliable resources available to help a person manage the money?
A timely question. We are now just seeing the first generation of retirees with healthy account balances move into the “de-accumulation” phase. And there has been a lot of discussion about providing support and guidance to those retirees.
I don’t think that the superannuation funds are there yet in providing that guidance, but clearly it’s something that is a work-in-progress.
As you could imagine, our super funds are heavily regulated by the federal government. And they should be – there is about $4 trillion in super, and our total stock market in Australia is only $2.5 trillion. Given their huge significance in the Australian economy, there is also a very high public expectation for them to be good custodians.
So I’m sure we will see a range of things put in place to “hold the hand” of retirees as they spend down their savings.
Greg, your response caused a light bulb to go on in my head. The proliferation of defined contribution plans in the US corresponds closely to the implementation of your Superannuation. We too are just beginning to see how retirees will deal with the de-accumulation phase of life.
There’s plenty of information and tools available to help educate us in order to make good decisions, but many don’t avail themselves. Professionals who are eager to help, run the gamut from good to bad; good luck trying to distinguish the difference.
Actually I just looked up the withdrawal options. Boy, I see a lot that can go wrong there and pretty strict limits on when it can be taken. Should be interesting when the generation wave hits.
One option is to buy an annuity from an insurance company. Where have I heard that before?
Dick, the discussion around the de-accumulation phase for superannuation in Australia seems to be less about the nitty gritty of rules and mechanisms, and more about giving retirees a feeling of confidence and comfort.
I think it’s similar to the retirement anxiety discussed recently on HD. People have been building their super over 30 or 40 years and understand that process. But they have never had to draw down on that super, and understandably will be anxious and apprehensive about it.
So there seems to be a push for the super funds to provide their fund members with withdrawal plans that are simple, transparent and give people a sense of comfort and confidence during their retirement.
I’m sure you are right, but from what I read it seems pretty complicated and has limitations. Alternate plans for people with a risk factor shown would be very helpful I’m sure.
Dick, yes – I think that’s the aim. Something like Drawdown Plans A, B and C that have stated benefits and risks, and that people can simply choose without needing to understand every single detail in the background. This would mirror what has been developed for fund members to use during the accumulation phase.
We have a financial advisor and a self-managed super fund, which puts us in a minority. Our advisor will guide us through this process once we retire. But it would certainly be a lot more daunting without that support.
Are withdrawals left to the individual to decide or paid as an annuity or at least that’s an option? Seems like a lot could go wrong with individuals just starting to withdraw as they please.
It sure works for Australia, I just don’t know how it could ever be implemented in the US, due to the millions of people, both retired and working, that have Social Security credits.
Given the bulk of the withdrawal phase has yet to start, I think that will be the real test if it works for the goal of retirement income. In essence it’s a forced saving defined contribution plan funded by deferred wages. That part sure seems to work, but the limits it has on withdrawals and the variables seem risky to me. Actually not that much different than 401k for withdrawals when you get to retirement age. It even allows lump sums.
Being serious now. Something along these lines ought to be doable. Consolidating plans to make the rules for contributions and distributions the same make sense. That would also eliminate confusion regarding the rules governing exceptions to the 10% early withdrawal penalty between various types of plans.
Looking at the different programs, different limits, and rules etc. it just doesn’t make sense to me.
I think you have something …
I would change one thing and that is the limit on wages the 10% applies to. I would not have a limit.
oh and another thing: expand what is considered a wage. I would include for example income that is not now classified as wages such as carried interest.
All possibilities, raising the taxable wage above the current method is not necessary though. The higher it goes the less people are affected by the change. Carried interest is a possibility but would affect very few people I suspect. You need to be careful how many oxen are gored.
You need to gain widespread support while limiting the “damage” to the most politically influential – sad but reality.
That’s also a reason I would not raise the taxable wage cap without giving credit in the benefits calculation for those earnings albeit at a accrual rate lower than current lowest 15% that applies to average monthly earnings of $7078. Also, if you don’t give credit, the system turns into welfare IMO and violates a founding principle.
“…raising the taxable wage above the current method is not necessary though. The higher it goes the less people are affected by the change.”
Isn’t this the argument as to why the cap should be lifted. At some point when it comes to income it’s just a bigger number on the balance sheet, ie it doesn’t affect the wealthy’s (extravagant?) lifestyle one iota.
There is not that much added revenue to be obtained is the point because fewer and fewer people have incomes above say the current amount of $184,500. Above that is about 5% of households. The real wealthy don’t have earned income. Warren Buffets salary is $100,000 the last I looked.
Also, I think it would be a serious mistake to not give benefit credits on all earnings subject to SS taxes. Some people suggest that.
I do however support stopping or modifying post retirement COLAs for beneficiaries who initially retire with the maximum FRA benefit on the basis nobody actually paid for future COLAs and if you accumulate the maximum FRA benefit you should have been able to accumulate additional assets for retirement.
Your final paragraph would be OK for newer workers as long as they know it decades ahead of time. An example is the 1983 Social Security Amendments of 1983 change to a later claiming ages. The changes should not affect those born between 1938-1959, as their financial decisions were made based on laws in effect during their working years. Also millions of people are already receiving cuts early retirement benefits for new claimants at 65 (when FRA is 67) which resulted in about a 13.3% reduction from the old standard, and claiming at 62 results in a 30% reduction from the new, higher full benefit.
You need to gain widespread support while limiting the “damage” to the most politically influential.
Can you imagine the push back from the insurance industry at the prospect of losing annuity sales from the 403b plans?
Yup, we are great at being our own worst enemy.
President Quinn, A question from The Times of London: I’m curious about your economic thought experiment, why should employers shoulder all the extra cost? For a lot of retail and wholesale businesses, margins are slim and payroll is the biggest expense; your rejigged solution would unfairly penalize that sector of your economy. Is this to make it more palatable to the electorate during your forthcoming campaign?
Good question. First, less resistance from workers. Second employers have been cutting retirement benefits for decades, third, some employers provide some benefits, some don’t, some more some less. This can level the playing field playfield. Fourth, easier to absorb by the economy. At least that’s my thinking. Hey, employers pay 12% in Australia 🤑
I think what you have proposed is a viable idea but Do you see small businesses signing up for this?
Probably opposed to the idea, but the reality is they would have to raise prices a bit, but everyone would be in the same situation.
In the UK the employer pays 3% the employee 4% and the government 1% by way of a tax break. Giving a minimum required contribution of 8%. I always encouraged my staff to contribute more and to actively move from the default fund into something slightly more aggressive and age appropriate.
From little I know and from what my friend in the UK says their government pensions are lower than our Social Security. For example after 16 years of COLAS my gross annual benefit is $41,328
That’s the UK state pension you’re thinking of—similar to US Social Security. I’m talking about something different: the UK workplace pension.
In the UK, employers are legally required to automatically enroll employees into a private pension plan, and both the employee and employer must contribute to it. It’s like if the US had a law requiring every employer to set up a 401(k) for you and force you to contribute to it (with matching), but you can’t opt out unless you actively choose to. The closest US equivalent would be a mandatory IRA or 401(k) that you’re automatically enrolled in by law, not by choice.
I can see it now, President Quinn….. RDQ, He’s For You!
How about an executive order on shopping carts🫣
I was hoping this would stimulate even half of the cart-gate opinions. Where are those folks anyway?
They all watched Cart Narcs and feel guilty. 🙂