The Next Great Bubble Boom

Research on Safe Withdrawal Rates

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Mike
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The Next Great Bubble Boom

Post by Mike »

I perused Harry S Dent's new book. He still thinks demographics will keep the bull going through 2009, but now he thinks the decennial cycle is more powerful than the demographic cycle (stocks perform better in the 2nd half of the decade due to corporate managers using 10 year plans that come to fruition then). He also advises the sell in May and go away strategy during the 2nd year of Presidential terms because incumbent Presidents are getting the pain over then so that they can goose the economy for the next election in years 3 and 4.

An interesting point he made is that rapidly increasing population has played a large role in economic growth for centuries, but population is expected to soon stabilize or decline in many nations. Declining population could result in declining economic stats. Once the bear comes, areas such as western Europe may not recover significantly during our life times.
JWR1945
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Post by JWR1945 »

Once the bear comes, areas such as western Europe may not recover significantly during our life times.
It is a good idea to look at how European countries and Japan handle their retirement systems. This will provide us an indication of what might happen to Social Security in the United States.

We learned from peteyperson that Great Britain cut retirement annuities. The Government had guaranteed the previous payouts. They walked away from that promise when it became obvious that payouts were unreasonably high. What the Government's involvement did accomplish was spreading the reductions evenly among all retirees instead of only on those who had made the worst choices.

Other countries on the continent have much more difficult problems. They have yet to face up to them.

Have fun.

John R.
bpp
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Post by bpp »

It is a good idea to look at how European countries and Japan handle their retirement systems. This will provide us an indication of what might happen to Social Security in the United States.
I can tell you what Japan is doing. Legislation was passed a few months ago that will raise the social security tax gradually from the current 13% of income to about 20% over the next decade and a half or so. On top of this, the payout levels will gradually decrease to about 80% of current levels over the same time period. The passage of this legislation cost the ruling party a lot of seats in the following election (which came soon after this vote), but it needed to be done and they did it, so I give them credit for that.

Bpp
Mike
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Post by Mike »

The trend would seem to be towards higher taxes and lower Social Security/Medicare benefits. The economy and stock market may also tank as they have in Japan.
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Post by MacDuff »

bpp wrote:
It is a good idea to look at how European countries and Japan handle their retirement systems. This will provide us an indication of what might happen to Social Security in the United States.
I can tell you what Japan is doing.
BPP, can you detail how they are handling the phase-in? Do benefits start dropping immediately? Are people who are already retirement age grandfathered into the old benefit levels, or does everyone get hit?

Mac
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Post by bpp »

Hi Mac,
BPP, can you detail how they are handling the phase-in? Do benefits start dropping immediately? Are people who are already retirement age grandfathered into the old benefit levels, or does everyone get hit?
Your question prompted me to look up Japan's Social Insurance Agency webpage, where I found a quick summary of the changes to the system.

The phase-in starts from October of this year. The social security tax rate for salaried workers will rise 0.354% per year for the next 10 years, until it reaches 18.30%. So the rate now would seem to be 14.76%. (I was wrong about the 13-20% range.) For non-salaried-workers, there is a fixed yearly contribution amount, which will similarly rise over the same time period.

The payouts will also start dropping right away, it seems, for both new retirees and for current recipients. New retirees will get a progressively lower starting payout, which uses a new "macro-economic slide" factor to reduce the starting payout level. The starting payout level for new retirees is currently set at around 60% of average salary (I believe). This will be reduced gradually by this macro-economic slide factor, but not below 50%. So the max reduction of initial benefits payout will be about 17%.

Current and future retirees, whose payouts are indexed to a consumer price index, will have that CPI adjustment reduced by this same macro-economic slide factor. So in other words, social security payouts for everyone will fall further and further behind the consumer price index.

This macro-economic slide factor, by the way, is based on the rate of reduction in the number of workers paying into the social security system and on the average length of payout per recipient (life expectancy). So as the ratio of workers to retirees drops, and as retiree lifespans increase, the benefits level per retiree will automatically be decreased.

In summary, everyone gets hit, both current and future retirees, though the pain is phased in gradually.

It's some pretty tough medicine, actually. Amazing that it even got passed. The opposition parties set out to run a two-week filibuster against it to run out the clock to the end of the legislative session, but it collapsed after 4 days or so. They are vowing to try to repeal these changes as soon as they get a chance, so who knows, this may not be the last word. But frankly, I don't think there is any other choice. I'm just amazed that any politicians had the guts to get this rammed through.

Bpp
Mike
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Post by Mike »

...social security payouts for everyone will fall further and further behind the consumer price index.
The United States has a long history of debasing the currency in times of stress. Way back in the beginning Congress paid the revolutionary war debt with a currency called Continentals, which soon became almost worthless. They made a big deal of saying they paid the debt to the last penny, but the pennies weren't worth much of anything. I suspect inflation will play a central role in "solving" the future budget crises, since it has so many times in the past.
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Post by unclemick »

The American dollar has been falling for a while now - some posters (On other forums) who are ex pat and have to pay their bills in 'stronger' currencies are beginning to notice/feel some pain.
bpp
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Post by bpp »

Hi unclemick,
The American dollar has been falling for a while now - some posters (On other forums) who are ex pat and have to pay their bills in 'stronger' currencies are beginning to notice/feel some pain.
Of course, those of us who are paid in 'stronger' currencies and regularly buy dollars are not complaining at all. But note that the dollar is still 30-40% stronger (relative to the yen) than it was at its nadir about 9 years ago, so to say that the dollar is "falling" is a somewhat time-scale-dependent thing.

Still, I think that inflation, and/or tinkering with the CPI is likely to be a more politically palatable way to handle the SS situation in the US than the more straight-forward Japanese approach -- though the net effect for retirees will likely end up being the same.

Bpp
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