The State of the Economy Thread - “Falling inflation, rising growth give U.S. the world’s best recovery”

[China]

What if the government abolished your 401(k)? Economists say accounts aren't worth it

 

The federal government should stop allowing pre-tax contributions to retirement savings, abolishing the 401(k) and Individual Retirement Account, two economists from opposing ideological camps argued in a research brief in January.

 

Allowing people to shelter their retirement money from taxes is a policy that largely favors the well-heeled, they said. Congress could use that money, nearly $200 billion a year in lost tax dollars, to shore up the underfunded Social Security program.

 

Their suggestion created a stir. One social media post has drawn more than 700,000 views.

 

 

"We do not think that this subsidy, which you can only rationalize if it increases saving ... we don't think it does increase saving very much," said Alicia Munnell, an assistant treasury secretary under President Clinton. She co-wrote the brief with Andrew Biggs, a senior fellow at the right-leaning American Enterprise Institute.

 

Why, then, are economists coming after your 401(k)?

That employee retirement plan and its personal savings counterpart, the Individual Retirement Account, were created to help Americans save for retirement.

 

But federal data suggests tax-favored retirement accounts help only some Americans, and wealthy Americans in particular.

 

For households in the top 10% by income, the median retirement account held $559,000 in 2022, according to the Survey of Consumer Finances. An overwhelming 93% of those households held retirement plans.

 

For middle-income Americans, those in the 40th to 60th percentile by income, the median retirement plan held just $39,000, and nearly half of that group had no retirement savings.

 

Many smaller employers don't offer 401(k) plans. Even when they do, workers might balk at participating, because they can't spare the income or they're afraid they might need to withdraw it later on, triggering tax penalties.

 

"Income for a lot of workers is very unpredictable," said Monique Morrissey, senior economist at the left-leaning Economic Policy Institute.

 

Click on the link for the full article

[Ball Security]

3 hours ago, China said:

What if the government abolished your 401(k)? Economists say accounts aren't worth it

 

The federal government should stop allowing pre-tax contributions to retirement savings, abolishing the 401(k) and Individual Retirement Account, two economists from opposing ideological camps argued in a research brief in January.

 

Allowing people to shelter their retirement money from taxes is a policy that largely favors the well-heeled, they said. Congress could use that money, nearly $200 billion a year in lost tax dollars, to shore up the underfunded Social Security program.

 

Their suggestion created a stir. One social media post has drawn more than 700,000 views.

 

 

"We do not think that this subsidy, which you can only rationalize if it increases saving ... we don't think it does increase saving very much," said Alicia Munnell, an assistant treasury secretary under President Clinton. She co-wrote the brief with Andrew Biggs, a senior fellow at the right-leaning American Enterprise Institute.

 

Why, then, are economists coming after your 401(k)?

That employee retirement plan and its personal savings counterpart, the Individual Retirement Account, were created to help Americans save for retirement.

 

But federal data suggests tax-favored retirement accounts help only some Americans, and wealthy Americans in particular.

 

For households in the top 10% by income, the median retirement account held $559,000 in 2022, according to the Survey of Consumer Finances. An overwhelming 93% of those households held retirement plans.

 

For middle-income Americans, those in the 40th to 60th percentile by income, the median retirement plan held just $39,000, and nearly half of that group had no retirement savings.

 

Many smaller employers don't offer 401(k) plans. Even when they do, workers might balk at participating, because they can't spare the income or they're afraid they might need to withdraw it later on, triggering tax penalties.

 

"Income for a lot of workers is very unpredictable," said Monique Morrissey, senior economist at the left-leaning Economic Policy Institute.

 

Click on the link for the full article

That’s, uh, that’s not good. Unless they decide to eliminate income and contribution limits to the Roth.

[Renegade7]

I mean, 401k was never meant to by itself supplement the limitations of social security.

 

The pension era is over, social security being able to pay closer to a full salary that fraction of an average would be interesting.  If any reason US considers it nondiscretionary funding

[PleaseBlitz]

I am not relying on social security. 

[Corcaigh]

The tax code has many anomalies and in this scenario certainly favors higher earners as their contributions are at their (higher) marginal rate compared to lower earners, and so they pay less tax than they would otherwise.

 

It is not the cause of the SS shortfall and making the connection will mostly confuse.

 

 

[Ball Security]

If the goal is to recoup the $185B in yearly tax avoidance form 401ks, maybe go after those who don’t pay their taxes.

“The gross tax gap nonfiling, underreporting, and underpayment component projections for Tax Years 2017-2019 timeframe are $41 billion, $433 billion, and $66 billion respectively.”

 

https://www.irs.gov/newsroom/the-tax-gap#:~:text=The gross tax gap nonfiling,billion%2C and %2466 billion respectively.

[Ball Security]

S&P 500 crosses the 5000 mark.

[Corcaigh]

The potential ‘time bomb’ for anyone with large tax deferred accounts is whether tax policy will change in the future. Will the decision pay off to defer taxes today during the strong earning phase of your career to a future time when total income will probably be lower, and therefore the top marginal tax rate you pay will be less.

 

Post retirement and before SS and RMDs kick in you can potentially do Roth conversions from tax deferred at lower rates, but need to be cognizant of the impact on ACA subsidies and IRMAA penalties.

 

That’s a fun math exercise for me with our CPA in the near future - how much to convert to Roth while keeping income at a level where other benefits aren’t impacted.

 

Again, much like the benefit that higher earners get from their 401k contributions, this is a (100% legal) tax shell game that the less affluent don’t get to play.

 

Doing it right will probably save several hundred thousand in taxes during retirement.

 

 

Edited February 9 by Corcaigh

[Corcaigh]

7 minutes ago, Ball Security said:

S&P 500 crosses the 5000 mark.

Has averaged about 13% per year over the past decade, including the COVID crash, and two other bear markets.

[Ball Security]

16 minutes ago, Corcaigh said:

 

 

That’s a fun math exercise for me with our CPA in the near future - how much to convert to Roth while keeping income at a level where other benefits aren’t impacted.

 

 

 

I’m a bit of a ways off from this, but have a few questions.

 

For a Roth conversion, the contribution limits don’t apply, right? For example, one could convert $25k in a given year even though the Roth contribution level is $6500 (maybe more in 2024).

 

However if you are working for income, and you did a conversion today, you are taxed at your current marginal rate. Right? So the bet is that rates will be higher in the future. Though the amount you draw from your 401k in retirement may be less than your current income.

 

Is the part that I quoted referring to lowering your RMDs to keep income low enough for government benefits? So we are talking about post 72/73ish versus your 60s?

[Corcaigh]

12 hours ago, Ball Security said:

I’m a bit of a ways off from this, but have a few questions.

 

For a Roth conversion, the contribution limits don’t apply, right? For example, one could convert $25k in a given year even though the Roth contribution level is $6500 (maybe more in 2024).

 

However if you are working for income, and you did a conversion today, you are taxed at your current marginal rate. Right? So the bet is that rates will be higher in the future. Though the amount you draw from your 401k in retirement may be less than your current income.

 

Is the part that I quoted referring to lowering your RMDs to keep income low enough for government benefits? So we are talking about post 72/73ish versus your 60s?

Yes, you could convert as much as you want from tax-deferred to Roth in any year but that will be treated as ordinary income along with any other income, so typically people would decide how high a marginal rate you are willing to bear, say the top of the 22% band.

 

RMDs kick in at some point in your 70s dependent on your age (now 75 for people born in 1960 or later). The idea of lowering your future RMDs via Roth conversions before you get there is potentially to pay more tax in the near term (but at a lower marginal rate than if you didn’t do any conversions and were getting RMDs on top of SS and any other income such as dividends, pensions etc.), and also to avoid higher IRMAA charges (fees paid by higher earners for Medicare benefits).

 

 

Edited February 10 by Corcaigh

[Cooked Crack]

 

 

 

[TradeTheBeal!]

Polls.

 

 

[TheDoyler23]

On 2/12/2024 at 9:45 AM, TradeTheBeal! said:

Polls.

 

 

 

 

I remember feeling weary but good about the economy for much of Trump's term. There was some worry about how hard he was using economic levers that are traditionally used when we are in a recession to keep things pumped up. Funny to think "I hope something bad doesn't happen otherwise there would be an economic mess barreling into place." And then... there was.  

 

Never underestimate the GOP to take something incredibly complex and distill it into a talking point that their base eats up. "DORITOS ARE 5 DOLLARS, WE MUST IMPEACH BIDEN!" 

[skinsmarydu]

2 hours ago, TheDoyler23 said:

"DORITOS ARE 5 DOLLARS, WE MUST IMPEACH BIDEN!" 

I'd say, "You don't know where or how to shop & POTUS has nothing to do with corn chips...talk to the Secretary of Ag." 

 

 

[China]

Americans Blame Corporate Profits and CEO Salaries for Price Increases

 

This Navigator Research report contains polling data on what Americans see as the drivers of inflation, as well as messaging guidance to communicate about corporate greed causing costs to rise.

 

The share of Americans who blame corporate greed as the main cause of inflation has risen significantly over the last two years.
 

85 percent of Americans say “corporations being greedy and raising prices to make record profits” is a cause of inflation, with a majority who say it is a major cause of inflation (59 percent), a 15-point increase since January 2022 (from 44 percent then to 59 percent now). The share blaming corporate greed as a major cause for inflation has increased across partisanship, including among Democrats by 17 points (from 55 percent then to 72 percent now), independents by 17 points (from 45 percent then to 62 percent now), and Republicans by 13 points (from 32 percent then to 45 percent now).

 

Click on the link for the full article

[China]

No, It’s Not “Inflation” — We’re Just Getting Ripped Off. Here’s Proof.

 

Excess corporate profits accounted for more than half of recent price increases. To stamp out inflation once and for all, we need to crack down on price gouging.
 

Many Americans are still experiencing the sticker shock they first faced two years ago when inflation hit its peak. But if inflation is down now, why are families still feeling the pinch?

The answer lies in corporate profits—and we have the data to prove it.

 

Our new report for the Groundwork Collaborative finds that corporate profits accounted for more than half—53 percent—of inflation from April to September 2023. That’s an astronomical percentage. Corporate profits drove just 11 percent of price growth in the four decades prior to the pandemic.

 

Businesses have been quick to blame rising costs on supply chain shocks from the pandemic and the war in Ukraine. But two years later, our economy has mostly returned to normal. In some cases, companies’ costs to make things and stock shelves have actually decreased.

 

Let’s demonstrate with one glaring example: diapers.

 

The hyper-consolidated diaper industry is dominated by just two companies, Procter & Gamble and Kimberly-Clark, which own well-known diaper brands like Pampers, Huggies, and Luvs. The cost of wood pulp, a key ingredient for making diapers absorbent, did spike during the pandemic, increasing by more than 50 percent between 2020 and 2021.

 

But last year it declined by 25 percent. Did that drop in costs lead Procter & Gamble and Kimberly-Clark to lower their prices? Far from it. Diaper prices have increased to nearly $22 on average.

 

These corporate giants have no plans to bring prices down anytime soon. In fact, their own executives are openly bragging about how they’re going to “expand margins” on earnings calls. Procter & Gamble predicted $800 million in windfall profits as input costs decline. Kimberly-Clark’s CEO said the company has “a lot of opportunity” to expand margins over time.

 

It’s not just diapers—while many corporations were quick to pass along rising costs, they’ve been in no hurry to pass along their savings. A recent survey from the Richmond Fed and Duke University revealed that 60 percent of companies plan to hike prices this year by more than they did before the pandemic, even though their costs have moderated.

 

Click on the link for the full article

 

[Ball Security]

The Dow and S&P 500 both hit historic highs today.

[Corcaigh]

13 hours ago, China said:

 

Let’s demonstrate with one glaring example: diapers.

 

 

 

No wonder Trump is so pissed

[Captain Wiggles]

13 minutes ago, Ball Security said:

The Dow and S&P 500 both hit historic highs today.

 

[Larry]

2 hours ago, Captain Wiggles said:

 

 

Including going bankrupt running a casino.  Where the one rule is "The House always wins".  

 

[China]

4 hours ago, Captain Wiggles said:

 

 

Make that 6 bankruptcies.

[Ball Security]

23 hours ago, Ball Security said:

The Dow and S&P 500 both hit historic highs today.

And this morning the Nasdaq gets involved also as all three break their record highs.

[TheGreatBuzz]

Makes sense.

 

[Cooked Crack]

What is Joe Brandon doing about these cookie prices?