Got $1,000 saved for retirement?

[moda0306]

I get that a lot of people like to rely on CD's for their retirement incoem, but let's really look at this for a second.

For not-so-sophisticated investors who didn't really save enough for retirement, we are dealing with Ron Paul types suggesting the following:

- Abolish SS (removing payment of perhaps $30k-40k per year).

- Increase the RoR on their savings account by a few percent ($200k * 3% (the spread between the 1% CD's are paying now, and perhaps a much more "natural" rate of interest, according to those claiming the elderly are being fleeced of their savings) = $6,000).

- Increase the risk of their savings account by removing FDIC protection (apparently this will just work like it did in 1930)


So you remove $30-$40k from their income because they're "stealing from productive workers," you then add back $6,000 of income on their $200k of investments, and then take away all FDIC protection, and we're supposed to say we're "helping" the elderly at this point?

I realize there are a lot of dynamics to FDIC protection and its affect on the lending system, but it creates a lack of principal risk that savers enjoy, at the price of lower RoR.

Further, who ever said that someone was entitled to a robust risk-free rate of return on their savings?  Risk-free savings, at its best (gold), won't deteriorate in real value against the general price level.  I'm not saying current rates are fair, but considering the low current inflation (general price level) rates, and especially that people have so much access to i-bonds, I see little reason to see savers as being "fleeced" in the sense that their savings is being stolen from them to a great degree.  You have to look at the subsidy side too, and realize that real returns aren't "natural" without taking risk.

[Pointedstick]

Moda, you're building a strawman argument here. I don't recall anyone in this thread arguing for abolishing social security or the FDIC, and certainly not in the context that edsanville has been talking about here which purely concerns how low interest rates hurt the financially conservative middle class. Personally, when I put on my "realistic policy wonk" hat I take off my libertarian one and stop talking about the end of Social Security and the FDIC.

But even then, let's imagine $400k lifetime savings by age 65 * 6% interest in a bunch of 7-year CDs or high-yield savings accounts = $24,000/yr = $2,000/mo. By the time you're old, you'll hopefully have paid off your 30-year mortgage, so let's eliminate that expense and replace it with out-of-pocket medical care. I could be wildly, insanely off base here, but it seems to me that as long as Medicare exists, this is a semi-realistic budget for a retired person who saves a modest sum in a conservative way. Am I nuts?

[moda0306]

PS,

That's possible.  But, assuming we're at about 2% inflation, if we were to give people a 4% real rate of return on a risk-free account, don't you think that's a significant subsidy?

[moda0306]

And I don't mean to throw up straw-men...

Regarding the FDIC, many Austrians oppose it, and regarding SS, this gets danced around a lot, but essentially there is strong opposition to it amongst the libertarian crowd.  They just realize that it can't REALISTICALLY be eliminated, but it often sounds like they think that is a shame.

[Kshartle]

And I don't mean to throw up straw-men...

Regarding the FDIC, many Austrians oppose it, and regarding SS, this gets danced around a lot, but essentially there is strong opposition to it amongst the libertarian crowd.  They just realize that it can't REALISTICALLY be eliminated, but it often sounds like they think that is a shame.

For God's sake eliminate them both.

They both create moral hazards that cause humans to engage in destructive economic activity. People believe they don't have to save because there's a welfare program waiting to take care of them (so they think). Poor and in particular African Americans get robbed their entire working life to send the money to old white people and they die before they collect even a fraction back from the next gen.

I don't care about someone's skin color, but if you're gonna make the case the SS is for the poor, tell that to a black guy with a life expectancy of 63. Sorry slave....I mean Sam.

FDIC is what Browne laughingly referred to as the "sticker program". The bank slaps a sticker up on the window and supposedly your money is safe. The Feds don't have the money to ensure the banks, they would have to just print it all. It actually ensures we'll have banks that fail because it ensures they will take risky bets. They don't have to satisfy depositors with open books of how responsible they are because they have the sticker! Now all banks have to do to compete for deposits is offer higher rates. How do you do that? They take riskier bets..........

[Pointedstick]

PS,

That's possible.  But, assuming we're at about 2% inflation, if we were to give people a 4% real rate of return on a risk-free account, don't you think that's a significant subsidy?

Of course it is. But so is police protection, national defense, the court system, Medicare, Social Security, the FDIC, and so on and so forth. That's what having a nation-state is all about: providing subsidies to favored insiders at the expense of either outsiders or disfavored insiders.

Right?

[edsanville]

PS,

That's possible.  But, assuming we're at about 2% inflation, if we were to give people a 4% real rate of return on a risk-free account, don't you think that's a significant subsidy?

I would say: "Maybe, maybe not."

This really is the heart of the matter, I think.  I think we start to have problems as a society when the real risk-free rate of return is almost zero, or worse yet, negative.  People should, on average, get something extra in the future for sacrificing in the present.  At the very least, people should not lose their wealth because they didn't spend it quickly enough. 

A positive real return better reflects the real world, and how the universe works naturally, IMHO.  In that sense, it would not be a subsidy if the 4% return came naturally as a result of savers' real sacrifices in present consumption.  Future returns always come from present sacrifices, no matter how much we cloud that fact with our complex modern monetary systems.

[moda0306]

Well this whole thing started as a statement of whether printing money is "stealing" from other people, which brought up price-level, which brought me into the realm of trying to show that control of interest rates in one direction can FAR offset money printing, and at what point people are being "artificially" rewarded/punished for savings.

So it's a bit hard to always tell who's winning and who's losing, sometimes, but I'm trying to identify those pressures to show why base money supply is NOT a proper measure of inflation/deflation, and therefore whether "theft" has occurred, especially against set expectations.

[edsanville]

Well this whole thing started as a statement of whether printing money is "stealing" from other people, which brought up price-level, which brought me into the realm of trying to show that control of interest rates in one direction can FAR offset money printing, and at what point people are being "artificially" rewarded/punished for savings.

So it's a bit hard to always tell who's winning and who's losing, sometimes, but I'm trying to identify those pressures to show why base money supply is NOT a proper measure of inflation/deflation, and therefore whether "theft" has occurred, especially against set expectations.

Perhaps when I said "printing money" it was a poor choice of words.  After this conversation, I realize that I really meant "printing money" as a sloppy shorthand for government intervention that leads to artificially low or negative real rates, whatever form that intervention may take.

[moda0306]

Edsanville,

It's tough because when the FED prints money, it's simply an asset swap with the private sector... so the Fed could never really mail people $5,000 checks, which is how all this started, but they can (along with other tools) manipulate interest rates.

When the federal government deficit-spends, however, it can increase the balances in people's savings, which is more like what we were talking about "spending money" into people's accounts.

[Kshartle]

people should not lose their wealth because they didn't spend it quickly enough. 

Bingo. If you lose your wealth because you chose to hold money you will be less inclined to hold money. There is no amount of weasel wording to deny that theft is taking place and the discouraging people from saving alters consumption patterns in a way that makes us poorer. Think of your friends who never save a penny. Are they the ones that help build a better economic future?!?!? Imagine if no one ever saved a penny. This is hyperinflation. Polite inflation is just a small step in that direction but still a step. It's still negative. All inflation is a drag on the economy. the economy can shrug off small amounts without too much damage but we can never say how much better off we'd be without it.

[moda0306]

people should not lose their wealth because they didn't spend it quickly enough. 

Bingo. If you lose your wealth because you chose to hold money you will be less inclined to hold money. There is no amount of weasel wording to deny that theft is taking place and the discouraging people from saving alters consumption patterns in a way that makes us poorer. Think of your friends who never save a penny. Are they the ones that help build a better economic future?!?!? Imagine if no one ever saved a penny. This is hyperinflation. Polite inflation is just a small step in that direction but still a step. It's still negative. All inflation is a drag on the economy. the economy can shrug off small amounts without too much damage but we can never say how much better off we'd be without it.

Ah "weasel wording" must be the new phrase for "balanced analysis of economic fundamentals."

K, try to actually stick with me on one of these intellectual tests, would you?

If the government does the following:

1) Prints more money (let's say a 5% increase in the monetary base).
2) With that money, buys treasury bonds out of the private sector.
3) Sets up a "new i-bond" that pays out CPI +5%, tax-free, to American savers, up to $20,000 per year.  These bonds have zero default risk.

Is the government punishing savers?

[Kshartle]

people should not lose their wealth because they didn't spend it quickly enough. 

Bingo. If you lose your wealth because you chose to hold money you will be less inclined to hold money. There is no amount of weasel wording to deny that theft is taking place and the discouraging people from saving alters consumption patterns in a way that makes us poorer. Think of your friends who never save a penny. Are they the ones that help build a better economic future?!?!? Imagine if no one ever saved a penny. This is hyperinflation. Polite inflation is just a small step in that direction but still a step. It's still negative. All inflation is a drag on the economy. the economy can shrug off small amounts without too much damage but we can never say how much better off we'd be without it.

Ah "weasel wording" must be the new phrase for "balanced analysis of economic fundamentals."

K, try to actually stick with me on one of these intellectual tests, would you?

If the government does the following:

1) Prints more money (let's say a 5% increase in the monetary base).
2) With that money, buys treasury bonds out of the private sector.
3) Sets up a "new i-bond" that pays out CPI +5%, tax-free, to American savers, up to $20,000 per year.  These bonds have zero default risk.

Is the government punishing savers?

When the government buys its own bonds it's just paying back it debts.....and with money printed out of thin air! So up to this point it has absolutely stolen. It borrowed money....bought stuff with it, printed money thus devaluing the dollar and paid back it's debts with the counterfiet money. It's the same as me borrowing from you then printing up the money in my basement. I didn't earn the purchasing power of the new money, but it still has purchasing power. Where did it come from? Everyone else's dollars......
I got to buy stuff and i never did a damn thing to earn it except slap some ink on paper and make something with no tangible or intrinsic value.


The new I-bond is just the government re-borrowing. If it promises rates at 5% above CPI then it will likely be getting a healthy premium above the face value such that the real rate will not even be close. Regardless, the only way for the government to make good on it's payments is to directly steal through taxes or indirectly from printing. The pitiful amount of money people pay government workers for actual goods and services they truly want is a tiny fraction of the budget. So it might stop printing and stealing from savers through inflation but it can never stop stealing.

Government consumes far in excess of the value it offers. That's why it has to steal directly and indirectly. Even this is not enough for the beast. It also borrows against the productivity of it's current and future victims. Lenders know it has the ultimate tools of theft in spades......guns and dungeons. The guns and dungeons back the collectors and the money printers.

[moda0306]

If it promises rates at 5% above CPI then it will likely be getting a healthy premium above the face value such that the real rate will not even be close.

Could you explain what that means? 

[Kshartle]

If it promises rates at 5% above CPI then it will likely be getting a healthy premium above the face value such that the real rate will not even be close.

Could you explain what that means?

if the prevailing interest rate for 10 year AA rated bond is 3% and I offer a 10 year AA rated bond at CPI+5%.....the market will take it's estimate for the CPI over that time....add 5% and compute an expected coupon payment. There will be a small reduction in the final price of the bond due to the risk of being wrong about the CPI part but investors will pay well above face value to get this bond.

I'm not going to sit here and calculate it but it would effectively be something like people paying $1,200 for a bond with a face value of $1,000. The interest payments are a function of the par value. Since you paid a premium for the bond you aren't really getting CPI+5%.....you're getting right around the 3% prevailing interest rate for a AA 10 year bond.

There's no free lunch.

[moda0306]

If it promises rates at 5% above CPI then it will likely be getting a healthy premium above the face value such that the real rate will not even be close.

Could you explain what that means?

if the prevailing interest rate for 10 year AA rated bond is 3% and I offer a 10 year AA rated bond at CPI+5%.....the market will take it's estimate for the CPI over that time....add 5% and compute an expected coupon payment. There will be a small reduction in the final price of the bond due to the risk of being wrong about the CPI part but investors will pay well above face value to get this bond.

I'm not going to sit here and calculate it but it would effectively be something like people paying $1,200 for a bond with a face value of $1,000. The interest payments are a function of the par value. Since you paid a premium for the bond you aren't really getting CPI+5%.....you're getting right around the 3% prevailing interest rate for a AA 10 year bond.

There's no free lunch.

I meant a non-marketable account, like a savings bond (i/ee).  Sorry for the confusion.  It's not something that trades on the open market.  I can go to the treasury directly and they'll give me a risk-free CPI+5%.

And even if it was marketable, if enough of these bonds existed, it would be a huge subsidy to savers.  You can't flood the market with something like that without it eventually taking hold.