I OVERSHOT

Jon Frater: ‘According to Globalsecurity.org, the U.S. spends $466 billion per year on defense, compared with the $500 billion per year the rest of the world spends (combined). It’s not as dramatic as twice or ten times, but heck, ‘almost as must as the rest of the world combined’ is a helluva talking point just the same.

☞ I’m surprised and stand corrected. But as you say, that 5% of the world’s inhabitants spend about as much as the other 95% combined may still make a point.

WHICH NESTS FOR THE EGGS

Dennis Gallagher: ‘Assuming you are able to contribute to both 401Ks and the Roth IRA, is it not better to max out the 401K before simply investing in a mutual fund or other instrument? If one is in, for instance, the 28% tax bracket, is not the 28% tax savings on this marginal income greater than the expected tax in retirement?’

First the employer-matched portion of your 401K. (It’s free money!) Then the Roth IRA. (No taxes at withdrawal, ever!) And then – if I have it right – your question is which should come next: additional contributions to your 401K not matched by your employer . . . or unsheltered investments?

I’d go for the non-sheltered because (a) you have more control over the money (don’t have to wait to age 59.5, can take tax losses to lower your income tax); (b) you avoid the 401K’s likely higher fees; (c) the capital gains and dividends tax rates may well be lower than your ordinary income rate at the time of withdrawal; (d) to the extent you invest for the long-term in tax-efficient funds, much of the appreciation would be sheltered from tax anyway; (e) in this example, you already have lots of dough tied up in untouchable 401Ks and Roth IRAs – so why not keep some funds accessible?

Others might reasonably argue that (a) they WANT the discipline that the 401K’s inflexibility provides; (b) they have decades to go until retirement, so putting to work for them the 28% of their wages that would otherwise be immediately taxed is well worth the eventual ordinary income tax that will be paid on withdrawals.

To each his own. The big picture here is that either choice is fine, because either one presumes you are saving a lot of money for retirement. That’s good for you and good for America. (We don’t save enough.)

MORE OF YOUR THOUGHTS ON SOCIAL SECURITY

Michael Cain: ‘In your response to Bruce Foerster, I was surprised that you didn’t point out that he would not be able to invest all of his Social Security taxes – first he would have to subtract out the premiums for a similar long-term disability insurance policy. Done through Social Security, the disability insurance is currently 0.94% of the 6.2% employee tax rate (same fraction for the employer), reducing the funds available for investment by 15%. He would probably still come out ahead on the investments, but not by nearly so much. On top of that, I’m not sure if you could even buy private disability insurance that looks like the SSDI benefit – a lifetime benefit if you are never able to return to work, indexed to inflation. I suspect that if you could find a comparable private policy, the premiums would amount to more than 1% of earnings.’

A lot of you found chinks in Bruce’s calculations. But the larger point is: the money we pay in is not, mainly, to be invested for our retirement, it is money for our grandmothers. Our bare-bones retirement safety net will be funded mainly by tomorrow’s workers. Only minor adjustments are required to make this work out okay.

Jon R: ‘Call me crazy, but is it asking too much for the fourth estate (you know the famed ‘liberal media’) to challenge a president who continually repeats the mantra that Social Security is going to go ‘bankrupt’ or ‘broke?’ In my opinion, there are only two plausible explanations for such a blatant misrepresentation of the state of SS’s finances: (a) The president is lying. Or (b) the president doesn’t understand how Social Security works. If either case is correct, does this position the president as someone from whom we should be taking recommendations for fixing Social Security? What on Earth does the repeated nonsense about 16 workers per retiree in 1950 have to do with Social Security’s current situation? Right now we know that with a ratio of 3 workers to 1 retiree and the current SS tax rates, the system is taking in more money than it needs to pay benefits. End of story.’

Sal Castaneda: ‘There are no Social Security surpluses!!!!!! All of that money has already been spent!!! That money will have to come from somewhere, either raising taxes or borrowing. Any suggestions?’

☞ If U.S. Treasury bonds are worthless, we’re in big trouble. That’s what the surplus is invested in – and in addition to the Trust Fund’s $1.8 trillion worth (if memory serves), Uncle Sam owes $6 trillion to others. I think we have to assume the U.S. will not default.

It’s not unreasonable for a great nation to support a National Debt. Indeed, if our economy grew 5% a year for the next 75 years (half from inflation, half from real growth), our current nearly $8 trillion National Debt could go $300 trillion deeper into the hole and still be no larger, relative to our economy, than the 70% or so it is today. (I would prefer to see it at 35% or 40%, but even that would allow us to borrow another $150 trillion over 75 years under these assumptions.)

The problem is that, with the $700 or $800 or $900 billion budget deficit we’re running – see yesterday’s column – we are growing the Debt much faster than the economy.

To avoid default – or even just severe economic pain – we need to get back to much more nearly balanced budgets of the type Clinton/Gore were running. Instead, Bush seems to determined to keep cutting taxes on the rich – e.g., cutting the estate tax on billionaires from what was a 55% rate down to zero – and making the problem worse.

Paul Kroger: ‘There are so many different reasons that W’s social security scam is flawed, but here is the best (if not the simplest) explanation of the real problem with social security (Bill Gross, of course).’

 

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