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Why $16 Trillion Only Hints at the True U.S. Debt


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#1 juslen

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Posted 09 December 2012 - 12:48 PM

By CHRIS COX AND BILL ARCHER

A decade and a half ago, both of us served on President Clinton's Bipartisan Commission on Entitlement and Tax Reform, the forerunner to President Obama's recent National Commission on Fiscal Responsibility and Reform. In 1994 we predicted that, unless something was done to control runaway entitlement spending, Medicare and Social Security would eventually go bankrupt or confront severe benefit cuts.

Eighteen years later, nothing has been done. Why? The usual reason is that entitlement reform is the third rail of American politics. That explanation presupposes voter demand for entitlements at any cost, even if it means bankrupting the nation.

A better explanation is that the full extent of the problem has remained hidden from policy makers and the public because of less than transparent government financial statements. How else could responsible officials claim that Medicare and Social Security have the resources they need to fulfill their commitments for years to come?

As Washington wrestles with the roughly $600 billion "fiscal cliff" and the 2013 budget, the far greater fiscal challenge of the U.S. government's unfunded pension and health-care liabilities remains offstage. The truly important figures would appear on the federal balance sheet—if the government prepared an accurate one.

But it hasn't. For years, the government has gotten by without having to produce the kind of financial statements that are required of most significant for-profit and nonprofit enterprises. The U.S. Treasury "balance sheet" does list liabilities such as Treasury debt issued to the public, federal employee pensions, and post-retirement health benefits. But it does not include the unfunded liabilities of Medicare, Social Security and other outsized and very real obligations.

As a result, fiscal policy discussions generally focus on current-year budget deficits, the accumulated national debt, and the relationships between these two items and gross domestic product. We most often hear about the alarming $15.96 trillion national debt (more than 100% of GDP), and the 2012 budget deficit of $1.1 trillion (6.97% of GDP). As dangerous as those numbers are, they do not begin to tell the story of the federal government's true liabilities.

The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.

Why haven't Americans heard about the titanic $86.8 trillion liability from these programs? One reason: The actual figures do not appear in black and white on any balance sheet. But it is possible to discover them. Included in the annual Medicare Trustees' report are separate actuarial estimates of the unfunded liability for Medicare Part A (the hospital portion), Part B (medical insurance) and Part D (prescription drug coverage).

As of the most recent Trustees' report in April, the net present value of the unfunded liability of Medicare was $42.8 trillion. The comparable balance sheet liability for Social Security is $20.5 trillion.

Were American policy makers to have the benefit of transparent financial statements prepared the way public companies must report their pension liabilities, they would see clearly the magnitude of the future borrowing that these liabilities imply. Borrowing on this scale could eclipse the capacity of global capital markets—and bankrupt not only the programs themselves but the entire federal government.

These real-world impacts will be felt when currently unfunded liabilities need to be paid. In theory, the Medicare and Social Security trust funds have at least some money to pay a portion of the bills that are coming due. In actuality, the cupboard is bare: 100% of the payroll taxes for these programs were spent in the same year they were collected.

In exchange for the payroll taxes that aren't paid out in benefits to current retirees in any given year, the trust funds got nonmarketable Treasury debt. Now, as the baby boomers' promised benefits swamp the payroll-tax collections from today's workers, the government has to swap the trust funds' nonmarketable securities for marketable Treasury debt. The Treasury will then have to sell not only this debt, but far more, in order to pay the benefits as they come due.

When combined with funding the general cash deficits, these multitrillion-dollar Treasury operations will dominate the capital markets in the years ahead, particularly given China's de-emphasis of new investment in U.S. Treasurys in favor of increasing foreign direct investment, and Japan's and Europe's own sovereign-debt challenges.

When the accrued expenses of the government's entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually. That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit.

Nothing like that $8 trillion amount is available for the IRS to target. According to the most recent tax data, all individuals filing tax returns in America and earning more than $66,193 per year have a total adjusted gross income of $5.1 trillion. In 2006, when corporate taxable income peaked before the recession, all corporations in the U.S. had total income for tax purposes of $1.6 trillion. That comes to $6.7 trillion available to tax from these individuals and corporations under existing tax laws.

In short, if the government confiscated the entire adjusted gross income of these American taxpayers, plus all of the corporate taxable income in the year before the recession, it wouldn't be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities. Some public officials and pundits claim we can dig our way out through tax increases on upper-income earners, or even all taxpayers. In reality, that would amount to bailing out the Pacific Ocean with a teaspoon. Only by addressing these unsustainable spending commitments can the nation's debt and deficit problems be solved.

Neither the public nor policy makers will be able to fully understand and deal with these issues unless the government publishes financial statements that present the government's largest financial liabilities in accordance with well-established norms in the private sector. When the new Congress convenes in January, making the numbers clear—and establishing policies that finally address them before it is too
late—should be a top order of business.

http://online.wsj.co...4039087636.html

---------------------

The question is simple, how is the United States going to pay for over 80 trillion in unfunded liabilities when workforce participation rates are falling, fewer young people are entering the work force to pay taxes and baby boomers will begin to retire at a record pace within the next 10 years? Raising taxes would be like pissing in the ocean, military cuts could make a nice dent and means testing could lessen the load for Medicare and Social Security but overall the United States has a major debt/deficit problem that may require raising taxes on all Americans accept those that continue to become dependent on government assistance. This is especially interesting considering both Democrats and Republicans are pushing for lower taxes for 90% of Americans. So where is this money going to come from? Lets say you could raise marginal taxes to historical levels of over 50%, what about the fact that as a percentage of GDP, raising taxes to such a level would provide a miniscule revenue boost and perhaps hinder economic growth to bring revenue down. Corporate taxes aren't the answer, they are already the highest in the world. Taxes on capital gains and dividends are already going to rise under the ACA. And last but not least, if the new health care legislation does not get health care costs under control, all Americans will end up having to deal with ever increasing premiums and rising health care costs. And all of this would be occurring along side record growth in student loan debt, near record low savings rates and nearly a trillion dollars in credit card debt. And with average wages falling along side rising food and energy costs how can the average United States citizen possibly withstand all of this? And last but not least, what happens if interest rates start to rise and additional cities and municipalities continue to fall short on their pension obligations and run into debt problems. One more thing, do you think the U.S government will attempt to target 401k accounts, pensions and IRA's?

Edited by juslen, 09 December 2012 - 12:51 PM.


#2 Aeternos Astramora

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Posted 09 December 2012 - 01:59 PM

So you're counting liabilities that won't be paid until the future, but ignoring revenues that won't be collected until the future?

#3 KainIIIC

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Posted 09 December 2012 - 02:15 PM

Entitlement Scare Tactics

Basically, a bunch of big numbers thrown around to scare people into believing that we MUST CUT NOW OR FACE DOoM! But they don't represent much of anything at all. This is like when Bush threw around those big "$58 trillion in unfunded liabilities" that turned out to be projected into infinity.

BUT WE MUST CUT SOCIAL SECURITY NOW! and turn it over to Wall Street, too! That's what our duly elected leader of our country, Pete Peterson, would want!

#4 commander thrawn

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Posted 09 December 2012 - 02:18 PM

So you're counting liabilities that won't be paid until the future, but ignoring revenues that won't be collected until the future?


This would be a nice defense, if it held any weight.

The actuarial reports that we get from medicare and social security indicate the unfunded part of the medicare and social security fund in discounted (present value) terms. Meaning they do account for future revenues and the growth of any current funding in the system. They are the projected deficit in the program because we do not have savings to help offset year over year growth in spending.

#5 Golan 1st

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Posted 09 December 2012 - 05:31 PM

People live longer and developments in medicine allow us to offer more medical services which cost money.
At the same time, fertility rates drop, which means that there are less people at working age for each retiree.
The inevitable conclusion is that the old models cannot work anymore.
Retirement age must be raised and social security payments must be adjusted.
I don't know how Americans pay for the public health services. In Israel, some of it is a tax, proportional to the person's earnings, and the rest is government budget (which is also funded by taxes, only they are not directly dedicated for this purpose). Raising taxes in inevitable if you want to maintain a good level of public medical services.

#6 commander thrawn

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Posted 09 December 2012 - 05:49 PM

People live longer and developments in medicine allow us to offer more medical services which cost money.
At the same time, fertility rates drop, which means that there are less people at working age for each retiree.
The inevitable conclusion is that the old models cannot work anymore.
Retirement age must be raised and social security payments must be adjusted.
I don't know how Americans pay for the public health services. In Israel, some of it is a tax, proportional to the person's earnings, and the rest is government budget (which is also funded by taxes, only they are not directly dedicated for this purpose). Raising taxes in inevitable if you want to maintain a good level of public medical services.


The simple answer is we don't. We built up a huge surplus in Social Security and Medicare after WW2, this was supposed to be set aside for pay for things going forward, instead we brought it into the general budget years ago and spent it all so we could make more promises and buy political favors. Now if you look at the 2 programs we have an almost $6 trillion (in present value) gap that will need to be filled. This means a combination of economic growth (more jobs, more people paying in and paying more), changes to the actuarial assumptions to mess with the numbers, a higher retirement age, no cap on taxable income for SSS and Medicare, and phasing out benefits for wealthier people, or more fundamental reforms.


I for one would favor making social security more like a 401K, and running it more simply.

Right now employees pay 4.2% of their wages into social security (which goes up to 6.2% if we let the cuts expire as part of whatever gets passed for the fiscal cliff), and 1.45% into medicare and these are matched by employers (except employers don't get the tax cut). But essentially my plan would give people the option to take their chunk of the social security tax (6.2% if the cuts go away) and they would put this into a special account where they would be able to invest it, or have the government put it in low-risk funds for themselves. Their medicare tax would stay in the medicare system and the employer portion would still go into the system.

The government would still give people the option of something similar to the current system for those that want it, and they would administer medicare (but likely with some other reforms). But what this would do is make it so those people who opt to have their own account still contribute to the government (through the employer portion) but the individuals bear more of the risk and also see potential upside.

#7 Golan 1st

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Posted 09 December 2012 - 06:06 PM

"Health tax" in Israel is close to 5% (the employer does not pay anything for that).
Yours sounds vey low to me, but when it started here, the only opposition was of the health organizations, who lost their grasp of their clients' balls. Your alergy to anything that smells of socialism wouldn't let that rate pass, I guess ;)

#8 Lord GVChamp

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Posted 09 December 2012 - 07:16 PM

I don't know how Americans pay for the public health services. In Israel, some of it is a tax, proportional to the person's earnings, and the rest is government budget (which is also funded by taxes, only they are not directly dedicated for this purpose). Raising taxes in inevitable if you want to maintain a good level of public medical services.

The United States already pays more for health-care at a government level, per person, than any country on Earth not named Norway or Luxembourg.

For this, about, what, a fifth of the population is covered by government? Specifically, the fifth of the population that has the shortest life expectancy?

Clearly, we have made some fantastic policy choices and we continue lavish medical care on people who....uhhh...don't need it as much as others.

#9 Golan 1st

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Posted 09 December 2012 - 07:26 PM

The United States already pays more for health-care at a government level, per person, than any country on Earth not named Norway or Luxembourg.

For this, about, what, a fifth of the population is covered by government? Specifically, the fifth of the population that has the shortest life expectancy?

Clearly, we have made some fantastic policy choices and we continue lavish medical care on people who....uhhh...don't need it as much as others.

I don't know how it works in the US...
Is the government buying health services from the private sector or are they public?

#10 commander thrawn

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Posted 09 December 2012 - 07:36 PM

I don't know how it works in the US...
Is the government buying health services from the private sector or are they public?


Its a bastardization of a system where the government provides insurance, sometimes directly sometimes through private providers but they end up effectively subsidizing high costs through over-regulation and sweetheart deals.

#11 Lord GVChamp

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Posted 09 December 2012 - 07:43 PM

What Thrawn said, the programs vary by state and by department.

#12 Hereno

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Posted 09 December 2012 - 07:57 PM

Social security is currently at a ridiculous like, 2.5 trillion dollar surplus, and is currently holding a lot of the debt from other !@#$ (like that 2 trillion dollar unnecessary war in Iraq, for instance). I'm quite tired of hearing about how awful the debt is from people who then complain that they have to pay taxes and vote for candidates who have pledged to never raise them.

#13 Golan 1st

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Posted 09 December 2012 - 08:05 PM

Social security is currently at a ridiculous like, 2.5 trillion dollar surplus, and is currently holding a lot of the debt from other !@#$ (like that 2 trillion dollar unnecessary war in Iraq, for instance). I'm quite tired of hearing about how awful the debt is from people who then complain that they have to pay taxes and vote for candidates who have pledged to never raise them.

Well, it's not as foolish as you make it sound when you remember that they are in favour of cutting government budget.

#14 juslen

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Posted 09 December 2012 - 08:16 PM

http://www.npr.org/2...00-million-loan

California isn't much different than the U.S government. School district owes one billion on a 100 million dollar loan. lol The difference is, in the United States, suckers who pay into social security think that there will always be enough people entering the workforce to pay taxes to make sure their payments (adjusted for inflation) will continue or will be paid out. The reality is, the ponzi scheme that is Social Security And Medicare will come to an end sooner or later when the government is forced to pay out benefits with worthless money.

#15 commander thrawn

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Posted 09 December 2012 - 08:22 PM

Social security is currently at a ridiculous like, 2.5 trillion dollar surplus, and is currently holding a lot of the debt from other !@#$ (like that 2 trillion dollar unnecessary war in Iraq, for instance). I'm quite tired of hearing about how awful the debt is from people who then complain that they have to pay taxes and vote for candidates who have pledged to never raise them.


Yes, but since no one is going to pay that money back, and since social security's costs are still going to outpace its revenues even if we did have that money. There still has to be some change.

#16 juslen

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Posted 09 December 2012 - 08:28 PM

Social security is currently at a ridiculous like, 2.5 trillion dollar surplus, and is currently holding a lot of the debt from other !@#$ (like that 2 trillion dollar unnecessary war in Iraq, for instance). I'm quite tired of hearing about how awful the debt is from people who then complain that they have to pay taxes and vote for candidates who have pledged to never raise them.


What a joke.. yes Social Security collects more in taxes then it pays out, but that surplus is SPENT, which means there is no surplus and this so called surplus is going to go into the red once more baby boomers reach retirement age. Put another way, there won't be enough people entering the work force to pay into taxes to cover the people who are exiting the workforce.

WASHINGTON (AP) — As millions of baby boomers flood Social Security with applications for benefits, the program's $2.7 trillion surplus is starting to look small.
For nearly three decades Social Security produced big surpluses, collecting more in taxes from workers than it paid in benefits to retirees, disabled workers, spouses and children. The surpluses also helped mask the size of the budget deficit being generated by the rest of the federal government.
Those days are over.
Since 2010, Social Security has been paying out more in benefits than it collects in taxes, adding to the urgency for Congress to address the program's long-term finances.
"To me, urgent doesn't begin to describe it," said Chuck Blahous, one of the public trustees who oversee Social Security. "I would say we're somewhere between critical and too late to deal with it."
The Social Security trustees project the surplus will be gone in 2033. Unless Congress acts, Social Security would only collect enough tax revenue each year to pay about 75 percent of benefits, triggering an automatic reduction.
Lawmakers from both political parties say they want to avoid such a dramatic benefit cut for people who have retired and might not have the means to make up the lost income. Still, that scenario is more than two decades away, which is why many in Congress are willing to put off changes.
But once the surplus is spent, the annual funding gaps start off big and grow fast, which could make them hard to rein in if Congress procrastinates.
The projected shortfall in 2033 is $623 billion, according to the trustees' latest report. It reaches $1 trillion in 2045 and nearly $7 trillion in 2086, the end of a 75-year period used by Social Security's number crunchers because it covers the retirement years of just about everyone working today.
Add up 75 years' worth of shortfalls and you get an astonishing figure: $134 trillion. Adjusted for inflation, that's $30.5 trillion in 2012 dollars, or eight times the size of this year's entire federal budget.
In present value terms, the Social Security Administration says the shortfall is $8.6 trillion. That means the agency would need to invest $8.6 trillion today, and have it pay returns of 2.9 percent above inflation for the next 75 years, to produce enough money to cover the shortfall.
That's the rate of return Social Security expects to get from its trust funds. The problem, of course, is that Social Security doesn't have an extra $8.6 trillion to invest.
Social Security Commissioner Michael J. Astrue said he is frustrated that little has been done to solve a problem that is only going to get harder to fix as 2033 approaches. If changes are done soon, they can be spread out over time, perhaps sparing current retirees while giving workers time to increase their savings.
"It won't be easy but it's just going to get harder the longer they wait," Astrue said.
There is no consensus in Washington on how pressing the problem is.
President Barack Obama created a deficit-reduction commission in 2010 but didn't embrace its plan for Social Security: raising the retirement age, reducing benefits for medium- and high-income workers and raising the cap on the amount of wages subject to the payroll tax, all very gradually.
The issue has been largely absent from this year's presidential election. Neither Obama nor his Republican opponent, Mitt Romney, has made it a significant part of the campaign.
Blahous, a Republican, warns that the magnitude of the problem is becoming so great that "Social Security's days as a self-financing program are numbered" if Congress doesn't act in the next few years. Democrat Robert Reischauer, Social Security's other public trustee, is less dire in his predictions but has told Congress that it needs to act within five years.
Others express less urgency.
"I would like to see Congress move on this tomorrow but we do have 22 years before there is any cut in Social Security benefits," said Sen. Bernie Sanders, a liberal independent from Vermont who heads the Senate Social Security caucus. "Compared to other crises — the collapse of the middle class, real wages falling for American workers, 50 million people having no health insurance — how would I rate the Social Security situation? Nowhere near as serious as these and many other problems."
AARP, the nation's most powerful lobbying group for older Americans, agrees.
"I'm not suggesting we need to wait 20 years but we do have time to make changes to Social Security so that we can pay the benefits we promised," said David Certner, AARP's legislative policy director. "Let's face it. Relative to a lot of other things right now, Social Security is in pretty good shape."
Social Security is financed by a 12.4 percent tax on wages. Workers pay half and their employers pay the other half. Self-employed workers pay the full amount.
The tax is applied to the first $110,100 of a worker's wages, a cap that rises each year with inflation. For 2011 and 2012, the tax rate for employees was reduced to 4.2 percent but is scheduled to return to 6.2 percent in January.
Social Security's finances are being hit by a wave of demographics as aging baby boomers reach retirement, leaving relatively fewer workers behind to pay into the system. In 1960, there were 4.9 workers paying Social Security taxes for each person getting benefits. Today, there are about 2.8 workers for each beneficiary, a ratio that will drop to 1.9 workers by 2035, according to projections by the Congressional Budget Office.
About 56 million people collect Social Security benefits, and that is projected to grow to 91 million in 2035. Monthly benefits average $1,235 for retired workers and $1,111 for disabled workers.
Marge Youngs, a 77-year-old widow from Toledo, Ohio, said Social Security makes up most of her income. She's reasonably sure that Social Security's financial problems won't affect her benefits but worries about her children and grandchildren.
"We might not have to worry about it, but it's the next generation coming up that will," Youngs said.
Corryn Grace Freeman, 22, a recent college graduate from Columbia, Md., said she understands the federal government must address its growing budget problems but worries that her generation will be "penalized" for being born late.
"It's like we're paying for the current elderly, we have to save more for ourselves, and we don't get any help in the future," Freeman said. "And not to mention we're facing one of the toughest job markets that the U.S. has been faced with.
"


Should I repeat that for you again? Social Security taxes are being spent on things other than social security benefits. Which means that the Federal Deficit is lower than it would be if there was actually a SS trust fund which held money for the sole purpose of paying out social security benefits. And this i precisely why Social Security is going to go bankrupt within the next 20 years. And this conservative estimate is based on revenue projections that assume that there will be an economic recovery sometime in the future. But the reality is.. there will be no recovery and the government will continue to spend your SS taxes on wars, welfare, unemployment and whatever else they can justify spending it on while you prance around looking for Unicorns instead of facing reality. :P

Edited by juslen, 09 December 2012 - 08:29 PM.


#17 Golan 1st

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Posted 09 December 2012 - 08:30 PM

http://www.npr.org/2...00-million-loan

California isn't much different than the U.S government. School district owes one billion on a 100 million dollar loan. lol The difference is, in the United States, suckers who pay into social security think that there will always be enough people entering the workforce to pay taxes to make sure their payments (adjusted for inflation) will continue or will be paid out. The reality is, the ponzi scheme that is Social Security And Medicare will come to an end sooner or later when the government is forced to pay out benefits with worthless money.

Well, to be fair, private insurance companies are not in much better position to pay people what they save for when they retire.
The whole retirement model which is common in the West cannot hold itself. It was created when most people did not pass 70 years, people had more children and nearly all most elderly people in their late 60s were in poor physical condition and couldn't work.
I really hate the idea of demanding more money for insurance and making old people work, but things changed to the point where massive adjustments are necessary to prevent the inevitable collapse of the system.
This is not unique to America. We are dealing with the same problem in Israel and I hear that many European countries are facing them too.

Edited by Golan 1st, 09 December 2012 - 08:30 PM.


#18 juslen

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Posted 09 December 2012 - 08:37 PM

Well, to be fair, private insurance companies are not in much better position to pay people what they save for when they retire.
The whole retirement model which is common in the West cannot hold itself. It was created when most people did not pass 70 years, people had more children and nearly all most elderly people in their late 60s were in poor physical condition and couldn't work.
I really hate the idea of demanding more money for insurance and making old people work, but things changed to the point where massive adjustments are necessary to prevent the inevitable collapse of the system.
This is not unique to America. We are dealing with the same problem in Israel and I hear that many European countries are facing them too.


I know they aren't! That is why this entire house of cards is going to come falling down. We are talking about pensions, 401k's, insurance tied to mutual funds and so forth are going to get wiped out. Not to mention bond holders once interest rates start to rise. Hell, money in the bank won't even be safe, it will either be lost through bank insolvency or it will have it's purchasing power destroyed through bailouts. There are hundreds of state and local municipalities that are hanging by a thread, that thread being their ability to bring in taxes and continue borrowing money at record low interest rates. When that comes to and end.. when revenues fall and interest rates rise (like they have in Greece) even large corporations will be brought to their knees as revenue will fall and cheap credit will dry up.

Edited by juslen, 09 December 2012 - 08:40 PM.


#19 Golan 1st

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Posted 09 December 2012 - 09:08 PM

since it's the second time it's mentioned here, what's 401k?

#20 commander thrawn

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Posted 09 December 2012 - 09:13 PM

since it's the second time it's mentioned here, what's 401k?


Its a type of retirement account with certain restrictions on how much you can put in it and how you can spend it but with tax benefits.

A standard 401K you can contribute you with pre-tax dollars, and you aren't taxed on it until you withdraw the funds in retirement.

A roth-401K you can contribute to with after-tax dollars but it grows tax free and you can withdraw it for free in retirement.




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