The state of the private sector retirement system

I said essentially the same thing five posts earlier. Now I'll admit that Aaron said it much more eloquently but suggesting that Aaron was the first to point out the difference between "own" and "not own" hurts my feelings and now I feel sad.

:_(

What? It's not even the first time someone's explained that specific concrete difference.

Jason, I know you're a fluent English speaker, so what gives? You can't possibly be having this much trouble parsing the word "savings." It is not a word that means "a valid method of retirement."

To borrow from another thread:

I didn't comment on "owning something", because as pointed out the government can just shred it if they want. "You can extract the nominal value you put in back in early from an account, but not from SS", by contrast is an annuity vs. not type distinction. Which brings us to:

I guess someone should tell all these people. Is Charles Schwab full of shit with their saving for retirement with an annuity page?

I think you guys are operating off "Social security is not savings" because of Republican talking points trying to privatize it, some unsupported assumptions about how private accounts are "real" while government law isn't, and you've backed yourself into the strange rhetorical corner now with "buying an annuity isn't savings." Go right ahead though, I guess.

What is the argument? My head is hurting here. I know that everyone must know the difference between a fund of money/assets that someone has saved up and a payment from a government program? They are different. Duh. In important ways. Like, in one case the entire fund is mine and I can do whatever I want with it in terms of spending it, saving it, (with some tax and other penalties) and giving it to my kids if there is still money in there when I am gone. Versus one where someone else decides how much I get and even whether I get anything and whether to give me more or less based on whatever.

Is anyone arguing that money saved by an individual is not different from money paid out from a government program?

I'm actually having a hard time really understanding what we're arguing about at this point :) But I'll try!

I think in some ways we're all struggling to define these things in terms of both law and economics and since I don't think we're lawyers or economists (though jeffd is apparently on his way!) it seems like we're maybe mixing some things up.

A 401k is an owned investment vehicle that contains a variety of assets. You have an ownership claim to the investments and the managers of the investment (fund managers, your broker, etc) are supposed to keep your assets completely separate from their own. If Acme Stocks and Bonds Online goes belly up your account will remain intact. You still own the underlying assets. If Acme does great but all your investments go bust you're screwed.

An annuity is an owned investment vehicle that provides you with annual income. You have an ownership claim to the investment at the terms provided. If Acme Annuity Co gets bought by Awesome Annuities LLC you'll still get your money because Awesome is now responsible for the contract. If Awesome goes bankrupt I think you'll have some claim against them though you may have to get in line behind more senior creditors.

I am not exactly sure where a pension falls in this continuum but I've never heard anything to suggest people have an ownership claim against the pension per se. It has always appeared to me more like a contractual obligation rather than an ownership interest. There are certainly people out there getting stiffed on their pensions because companies went bankrupt.

Social Security confers no ownership interest but its "third rail" status makes it very difficult to modify because of various political realities. If the Congress 114 buys out Congress 113 (ha!) they have zero obligation to keep paying you social security as a matter of law. (They make the laws after all.) And yet in some ways this might be even safer of an "investment" (though it is not one) than an annuity or a pension.

So I agree that in many ways these things are "roughly" equivalent. They can all be affected by laws and by markets (even SS because it's going to be either more or less solvent depending on the overall economy and tax revenue levels).

I just think there are enough differences between these retirement vehicles to suggest that it's probably unhelpful to lump them together too much. "Roughly equivalent" can turn to "totally dissimilar" given the right circumstances. :)

fwiw I kind of see where Jason is coming from; functionally if you squint just right and treat it like a black box, Social Security sure looks like an annuity and thus savings. That being said if you're interested in having a precise conversation about the subject - not to mention not feeding into popular conservative myths - it's probably best not to muddy the waters in such a fashion.

Argh. Once you have an annuity, you no longer have savings, you have an income stream until you, or your survivor (if a survivor annuity) dies. You buy the annuity with your savings. You then no longer have the savings. I think the phrase is "one cannot have one's cake and eat it"

Yes, the annuity income stream that comes from government welfare schemes (SS) should be included in your retirement planning calculations, like the way that senior citizen discounts should be included (cheaper living costs)

My mother gets free local public transport, this is worth about 10 USD a week to her. But no way does this mean that she has 10-12,000 USD in savings (what the 500 USD she now doesn't have to spend on public transport is approximately worth, were she using income from savings to pay for it)

Of course, it may make someone decide that they don't have to save as much for their retirement as free (local) public transport will lower their living costs materially. But "not having to save 10,000 USD due to free transport" is not equivalent to "I have 10,000 USD in savings"

I confess to not being up on retirement planning. If you were to sign up for an annuity and die the next day, do you really forfeit all the cash you put into the annuity?

By definition, yes. But that pays for the people who buy an annuity and live to 105, You can buy survivor annuity for your spouse/ partner, but not for next generation, and obviously price of annuity is then dependent on age of partner

One way to think of an annuity is "insurance against outliving my savings"

Huh. What's the typical annuity yield, per year, as a percentage of the purchase price?

Alternative framing: what's the typical "break even" timeline?

In UK, here is table

http://www.ft.com/intl/personal-finance/annuity-table

Note that can buy guarantee annuity, so 5 year income even if die next day...

There are also inflation protection options - annuity choice is about risk management - how long do you think you will live, what if inflation starts up again etc. etc.

Oh my stars, could people on the internet really be using imprecise language? Could an investment bank's marketing speak really be full of shit? The scales have fallen from my eyes today!

No, weirdo, we're operating off of knowledge of what the word "savings" means. And you're the one who keeps trying to pin this "private accounts are more secure/stable/real than Social Security is" nonsense on us. We're talking about simple mechanics here.

Basically. If you want to say it's a bad idea to call them "savings" for political reasons, sure, but the concrete technical reasons about why its not "savings" given are pretty weak. "It's an income stream, not an asset, so don't call it savings" is pretty good, but I'm a bit baffled how it took 3.5 pages of "don't be ridiculous, it's not savings because of <reason that has nothing to do with definitions or common usage>" to get there.

It's still a perfectly valid way to "save for retirement" in the same way annuities are, but that's verb vs. noun definition.

I think that's pushing a bit; discounts or in-kind reimbursements like Medicare and transport are locked to a specific form of spending. Annuities are just straight cash disbursement.

To be amusing, is it legal to sell off your social security revenue stream for a lump sum? Do any annuities let you do that? Does that convert it back into savings?

I found something,

apparently you can pass something from your SS to your relative after you are dead...

it's not much but it's something..

Jason, yes of course is legal. It is called taking a loan (converting an income stream into a lump sum now). Of course, lenders would be reluctant, but I am sure it happens.

Technically, I think it count as an investment, not savings.

Coming in very late to this discussion. But just for future reference, if I'm a US citizen, which countries will I get in trouble with for Social Security if I move there?

http://ssa-custhelp.ssa.gov/app/ans...ceiving-benefits-if-outside-the-united-states

Jason, you are a pit bull once you choose a position. LOL! Social Security is not savings. Period. It is no more savings than welfare or unemployment is savings.

Interestingly, if inflation continues to be higher then government bond interest rates, as well as if the payroll tax cut continues, social security will be several years closer to only fufilling 80% of it's liabilities.

That is one problem with SocSec's investment mandate. Another is that by staying solely in US denominated instruments, as the value of the USD declines over time against foreign currencies it will buy fewer imported goods and services, which sucks as we get more and more of our G&S as imports. The result is similar to the problem of buying long term US bonds in a rising interest rate environment but has a different solution: FX diversification rather than just, say, bond duration diversification.

I mean once the world stops using USD as the currency for trading oil (which I believe is likely within 20 years) I have no fucking clue the flux that's going to happen to our international spending power. Maybe awesome or maybe shit.

I'm fine with the US running a sovereign wealth fun but I can't even imagine how hard it'd be to get it passed.