Posts Tagged ‘Retirement’
We got a problem here folks, and it’s going to lead to the next crash — and sooner than you think.
First, let’s talk about the impact of QE on companies. The common mantra is that it makes it “easier” for firms to borrow money. The problem is that borrowing, in general, is a destructive act as you must pay back said borrowing with interest — no matter how small. The bigger problem, however, is that long-established businesses have obligations that were all contracted with the expectation of lending other people money and earning a spread on it, such as their pensions.
“The continued decline in the pension discount rates, driven by the unprecedented low interest rate environment, has caused a significant noncash increase in our pension expense,” said Greg Smith, Boeing’s CFO.
No, really? You just noticed this now when I’ve been pointing it out in this column and in fact called out to union members that they were being systematically destroyed by these policies in The Ticker – since 2008?
The problem with this impact is that it doesn’t disappear when QE ends. It’s cumulative and permanent. This is the nature ofall compound functions and is why it’s so destructive across the board to implement so-called “emergency” policies — but nowhere is the impact going to be worse from a financial markets perspective than in companies who are now stuck with the pension impacts.
What’s worse is that when these plans fail to be able to deliver in a decade or so the impact is going to come right up the chute of those around 50ish now, at the same time their earnings have been destroyed on their retirement funds.
Between now-retired people who have had their portfolio returns in fixed income destroyed over the last few years you can now add everyone who is in the “pre-retirement” mode, specifically those around 10-15 years from retirement. Those are the people who were made promises in pension funds that are not going to be kept because of the impossible-to-recover impact of 5+ years of “crisis” interet rates and repression.
In short what has happened is that the 50+ population segment has had its money stolen in The Fed’s “monetary experiment” — and few if any of them understand what has been done to them.
They will, however, when they’re eating catfood — and that day is coming much sooner than anyone would think.
The destructive effect of this policy cannot be overstated. The peak earnings years for most people are in their 50s, but it is those earnings that fund retirement spending which is to a large degree discretionary for those in middle incomes and above. And those returns, despite claims that “most of the wealth has been returned to people in the stock market”, have been trashed.
What’s worse is that as the stock market has more than doubled off the lows of 2009 it has sucked people back into the market, especially now in the last couple of months. Most people did not sell out in 2007 or early 2008, despite people like me shouting from the rooftops that you were about to get your head cut off. Nor will anyone listen this time either, yet the problem for most stocks is that the actual value of all stocks in the long term is determined only by the discounted cash flow of dividends; everything else is speculative premium in that someone has to come along that believes in the future appreciation of price or you cannot sell!
Finally, the paradox of “easy money” is that while it appears to make government borrowing “free” it is in fact not free at all. At the same time it makes running large fiscal debts appear sustainable and thus encourages overspending (and in fact is designed to cause such overspending) at the same time it destroys the incentive of banks and other entities to lend money in the private market as there is no return that can be earned by doing so. Since risk must be paid for in the form of interest as the rate is depressed the incentive to take said risk with loans evaporates as the profit in doing so disappears. Remember that nobody ever intentionally lends at a loss.
Finally, we have embedded into our budget process these trillion dollar deficits. Congress must stop this right here and now, but there is scant evidence that it will. If Boehner, Pelosi, McConnell and Reid do not stop the destructive cycle of deficit spending within this budget cycle the risk rises precipitously that the market will pull the rug out from under the charade for them.
We are headed for a crack-up folks, and not of the “hyperinflationary boom” sort either.
Last year we had this sort of rally in the early part of the year, then things went soft. This year we’ve got even more stressors that are in the marketplace but they’re being ignored to a degree that is even larger. One of those is the ill-advised 2% Payroll Tax abatement that has done material and permanent damage to Social Security funding — specifically, it has loaded a monstrous hosing aimed at the 50+ age group right as the rest of the monetary games have targeted this same group of people.
Folks, the entirety of the market’s rise last year can be credited to multiple expansion, more or less. Expecting more of the same when you’re destroying the component of the population that has the largest disposible income by age group is foolish.
The market can (and will) remain irrational for longer than you can remain solvent shorting it, but the fact of the matter is that the cliff edge is much closer and the edge far more fragile than you believe.
And this time there are no fed policies that can be brought in to “save the day.”
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If you want to frighten Baby Boomers, just show them the list of statistics in this article. The United States is headed for a retirement crisis of unprecedented magnitude, and we are woefully unprepared for it. At this point, more than 10,000 Baby Boomers are reaching the age of 65 every single day, and this will continue to happen for almost the next 20 years. The number of senior citizens in America is projected to more than double during the first half of this century, and some absolutely enormous financial promises have been made to them. So will we be able to keep those promises to the hordes of American workers that are rapidly approaching retirement? Of course not. State and local governments are facing trillions in unfunded pension liabilities. Medicare is facing a 38 trillion dollar shortfall over the next 75 years. The Social Security system is facing a 134 trillion dollar shortfall over the next 75 years. Meanwhile, nearly half of all American workers have less than $10,000 saved for retirement. The truth is that I was being incredibly kind when I said earlier that we are “woefully unprepared” for what is coming. The biggest retirement crisis in history is rapidly approaching, and a lot of the promises that were made to the Baby Boomers are going to get broken.
The following are 35 incredibly shocking statistics that will scare just about any Baby Boomer…
1. Right now, there are somewhere around 40 million senior citizens in the United States. By 2050 that number is projected to skyrocket to 89 million.
2. According to one recent poll, 25 percent of all Americans in the 46 to 64-year-old age bracket have no retirement savings at all.
3. 26 percent of all Americans in the 46 to 64-year-old age bracket have no personal savings whatsoever.
4. One survey that covered all American workers found that 46 percentof them have less than $10,000 saved for retirement.
5. According to a survey conducted by the Employee Benefit Research Institute, “60 percent of American workers said the total value of their savings and investments is less than $25,000″.
6. A Pew Research survey found that half of all Baby Boomers say that their household financial situations have deteriorated over the past year.
7. 67 percent of all American workers believe that they “are a little or a lot behind schedule on saving for retirement”.
8. Today, one out of every six elderly Americans lives below the federal poverty line.
9. More elderly Americans than ever are finding that they must continue working once they reach their retirement years. Between 1985 and 2010, the percentage of Americans in the 65 to 69-year-old age bracket that were still working increased from 18 percent to 32 percent.
10. Back in 1991, half of all American workers planned to retire before they reached the age of 65. Today, that number has declined to 23 percent.
11. According to one recent survey, 70 percent of all American workers expect to continue working once they are “retired”.
12. According to a poll conducted by AARP, 40 percent of all Baby Boomers plan to work “until they drop”.
13. A poll conducted by CESI Debt Solutions found that 56 percent of American retirees still had outstanding debts when they retired.
14. Elderly Americans tend to carry much higher balances on their credit cards than younger Americans do. The following is from a recent CNBC article…
New research from the AARP also shows that those ages 50 and over are carrying higher balances on their credit cards — $8,278 in 2012 compared to $6,258 for the under-50 population.
15. A study by a law professor at the University of Michigan found that Americans that are 55 years of age or older now account for 20 percentof all bankruptcies in the United States. Back in 2001, they only accounted for 12 percent of all bankruptcies.
16. Between 1991 and 2007 the number of Americans between the ages of 65 and 74 that filed for bankruptcy rose by a staggering 178 percent.
17. What is causing most of these bankruptcies among the elderly? The number one cause is medical bills. According to a report published in The American Journal of Medicine, medical bills are a major factor in more than 60 percent of the personal bankruptcies in the United States. Of those bankruptcies that were caused by medical bills, approximately 75 percent of them involved individuals that actually did have health insurance.
18. In 1945, there were 42 workers for every retiree receiving Social Security benefits. Today, that number has fallen to 2.5 workers, and if you eliminate all government workers, that leaves only 1.6 private sector workers for every retiree receiving Social Security benefits.
19. Millions of elderly Americans these days are finding it very difficult to survive on just a Social Security check. The truth is that most Social Security checks simply are not that large. The following comes directly from the Social Security Administration website…
The average monthly Social Security benefit for a retired worker was about $1,230 at the beginning of 2012. This amount changes monthly based upon the total amount of all benefits paid and the total number of people receiving benefits.
Could you live on about 300 dollars a week?
20. Social Security benefits are not going to stretch as far in future years. The following is from an article on the AARP website…
Social Security benefits won’t go as far, either. In 2002, benefits replaced 39 percent of the average retirees salary, and that will decline to 28 percent in 2030, when the youngest boomers reach full retirement age, according to the Center for Retirement Research at Boston College.
22. Overall, the Social Security system is facing a 134 trillion dollar shortfall over the next 75 years.
25. Today, only 10 percent of private companies in the U.S. provide guaranteed lifelong pensions for their employees.
26. Verizon’s pension plan is underfunded by 3.4 billion dollars.
27. In California, the Orange County Employees Retirement System is estimated to have a 10 billion dollar unfunded pension liability.
28. The state of Illinois has accumulated unfunded pension liabilities of more than 77 billion dollars.
29. Pension consultant Girard Miller told California’s Little Hoover Commission that state and local government bodies in the state of California have 325 billion dollars in combined unfunded pension liabilities.
30. According to Northwestern University Professor John Rauh, the latest estimate of the total amount of unfunded pension and healthcare obligations for retirees that state and local governments across the United States have accumulated is 4.4 trillion dollars.
31. In 2010, 28 percent of all American workers with a 401(k) had taken money out of it at some point.
32. Back in 2004, American workers were taking about 30 billion dollars in early withdrawals out of their 401(k) accounts every single year. Right now, American workers are pulling about 70 billion dollars in early withdrawals out of their 401(k) accounts every single year.
33. Today, 49 percent of all American workers are not covered by an employment-based pension plan at all.
34. According to a recent survey conducted by Americans for Secure Retirement, 88 percent of all Americans are worried about “maintaining a comfortable standard of living in retirement”.
35. A study conducted by Boston College’s Center for Retirement Research found that American workers are $6.6 trillion short of what they need to retire comfortably.
So what is the solution? Well, one influential organization of business executives says that the solution is to make Americans wait longer for retirement. The following is from a recent CBS News article…
An influential group of business CEOs is pushing a plan to gradually increase the full retirement age to 70 for both Social Security and Medicare and to partially privatize the health insurance program for older Americans.
The Business Roundtable’s plan would protect those 55 and older from cuts but younger workers would face significant changes. The plan unveiled Wednesday would result in smaller annual benefit increases for all Social Security recipients. Initial benefits for wealthy retirees would also be smaller.
But considering the fact that there aren’t nearly enough jobs for all Americans already, perhaps that is not such a great idea. If we expect Americans to work longer, then we are going to need our economy to start producing a lot more good jobs than it is producing right now.
Of course the status quo is not going to work either. There is no way that we are going to be able to meet the financial obligations that are coming due.
The federal government, our state governments and our local governments are already drowning in debt and we are already spending far more money than we bring in each year. How in the world are we going to make ends meet as our obligations to retirees absolutely skyrocket in the years ahead?
That is something to think about.
So what do you think? Do you believe that there is a solution to our retirement crisis? Do you think that we can actually keep all of the promises that we have made to the Baby Boomers? Please feel free to post a comment with your thoughts below…
Here are the facts. Medicare is a critical program that helps people age 65 or older achieve health security. But it’s headed for a painful collapse. Independent experts and leaders in both parties agree that if we do nothing, Medicare will exhaust its trust fund in nine years, putting enormous pressure on the federal budget as health-care costs continue to rise. Unless we act, we’re moving toward a debt-fueled economic crisis, harsh cuts that affect today’s seniors and enormous tax increases that diminish the dreams of the next generation.
We can save Medicare, but we have to reform it so that it delivers the high quality we expect, at a price we can afford.
Medicare is one of the worst examples of forced cost-shifting at the point of a gun. It creates monstrous distortions in the delivery of health care and, when coupled with a legal environment that permits behavior illegal in other fields (anti-trust exemptions, demands to provide service to those who cannot pay, including those who can’t pay by choice and explicit legal support for price-fixing across international boundaries) we have created a “free money spigot” that has cranked up the cost of health care at multiples of the general inflation rate while failing to materially improve the quality of care.
But compound functions like this cannot go on forever. The solution is not “vouchers”, which simply shift the cost yet again, this time onto the back of seniors instead of the population generally. Nor can we realistically exempt anyone 55 and older – the bulk of the boomers are in the bracket from 55-65, and they will enter the system over the next ten years.
We must fix the structure of health care in the United States.
But neither the left or right is interested in doing this. Fixing the structure of health care means telling the medical industry to stick it. It means repealing EMTALA and forcing level pricing and billing for everyone, forbidding medical providers from forcing you to pay for Juanita’s illegal entry to the United States which she did for the explicit purpose of obtaining “free” medical care when she gave birth. It means telling the pharmaceutical and device firms that if they are going to sell drugs in other first-world nations like Canada for $2/pill they cannot price-fix here, and that if someone buys those drugs in another nation and re-imports them, that’s perfectly legal. It means having the conversation with the American public we needed to have two decades ago, explaining that Grandma cannot have two new hips and Grandpa a quadruple-bypass – we simply don’t have the money to provide one hundred million of those over a space of 20 years, and that’s what the current system is demanding we provide.
It requires that we have an honest discussion about not only personal responsibility, but also a full and robust scientific review of what we’re telling people about diet and exercise. Does everyone need that 30 minutes of moderate exercise at least three times a week? Yes. But is the “food pyramid” as currently constructed and promoted valid? That’s a better question, especially in the world of engineered “foods” such as high-fructose corn syrup and other high-glycemic-index processed foods that do nothing about satisfying hunger but do plenty to fatten both waistlines and “food” company balance sheets.
Never mind the other problem we have with the medical industry – being sick is big business. Especially if you’re “chronically” sick but the industry can give you a nice pill and make it all better. For a while, anyway. We have a diabetes epidemic in the United States but much of it is self-inflicted. It’s easier to demand a $300/month prescription for some wonder drug (even with its risks and side effects) than to buy a $100 pair of running shoes and get off your ass, even though a huge percentage of Type II diabetics are 50lbs or more overweight and if they lose the weight their blood sugar will either come back into balance or they will be able to control it with older, generic medications that cost pennies. What is our social responsibility as a nation to provide? The running shoes, the $300/month pill, or nothing, since the solution is as close as the suffers’ pie hole?
None of this is easy and it sure as hell is tougher than simply running the common demagogue positions on the left and right. The right wants to throw Granny down the stairs. The left wants socialized medicine.
The truth is that if we don’t cut the crap we’re going to wind up both ridiculously ill and broke. Our nation cannot continue on the path we’re on. We cannot “get our health care costs under control” while maintaining the system for health care as it exists now in the United States.
There’s no way to solve the cost escalation problem, with near-double-digit increases every year in actual cost, without shutting off the cost-shifting and changing the paradigm on how health care works in the United States. EMTALA may have been well-intentioned but it has become of the biggest drivers in the escalation of hospital costs, rendering nearly anyone, even those who are insured, subject to instant financial ruin should they have a medical emergency.
The common tonics dispensed by the left and right sound good but they’re both wrong and time is running out to do the right thing.
Ryan’s plan isn’t it.