George Ure and Gaye Levy, Contributors
Time to take on one of the ugliest questions an American worker can ask: “Do I have to work until death?”
Sadly, for an increasing number of Americans, the idea of retirement at age 62 to a life rich with adventures and the once-held American dream of “Golden Years” has turned into cardboard, or worse.
We’ve identified a large number of factors which are in play and a discussion of each helps to put “Working to Death” into perspective.
- Mass consumption Home Improvement Loans and HELOCs.
- The soaring divorce rates of recent years.
- Inter-government “investment” of Social Security.
- Long-term inflation by the Federal Reserve.
- Soaring healthcare costs.
- Serial market declines.
- Pension fund bankruptcies and shortages.
Let’s address these in turn, starting with home improvement loans and HELOCs – the once darlings of the financial “services” industry standing for Home Equity Lines of Credit.
At their peak, during the go-go years of the 1990s and into beginning of the end of the housing bubble in 2007, the number of people “borrowing home equity” for current expenses, such as education, a new SUV, or to meet unexpected cash flow demands, skyrocketed.
A Huge Problem with the Payback
The problem was that most people never really paid the money back, so when the housing collapse began in earnest in 2008 (and arguably by the Case Shiller/S&P Housing Index report, it continues even now with housing prices stuck at 2003 levels) hundreds of thousands faced bankruptcy.
If you thought the housing collapse was done, wake up and think again. The US Attorney Legal Services web site reports an estimated 4-million delinquent mortgages are heading into foreclosure this year.
Another factor not often addressed is the impact of a raging national divorce rate in the period. Depending on which source you want to consider, the divorce rate in the US jumped by between 25 and 50% between the 1950s and 1970s through 1980s levels.
This means some increased pressure in home lending at the time, but in the follow-on period which we’re in now, plenty of single women from their late 50s to low 70s find that because of financial emergencies, low wages, and the pressures of parenting, they just haven’t been able to get the home paid off.
With Social Security not keeping up with real inflation, this means thousands of aging women will have to stay in the workforce, or face the specter of losing their homes and having to move into either a very small condo, or worse: lose a lifetime of working for a paid-off home entirely by going into the rental market.
And Then There is Social Security
The government’s stewardship of Social Security funds is another area of concern. According to the Social Security web site:
The Social Security Trust Funds are the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) Trust Funds. These funds are accounts managed by the Department of the Treasury. They serve two purposes: (1) they provide an accounting mechanism for tracking all income to and disbursements from the trust funds, and (2) they hold the accumulated assets. These accumulated assets provide automatic spending authority to pay benefits. The Social Security Act limits trust fund expenditures to benefits and administrative costs.
Benefits to retired workers and their families, and to families of deceased workers, are paid from the OASI Trust Fund. Benefits to disabled workers and their families are paid from the DI Trust Fund. More than 98 percent of total disbursements in 2011 were for benefit payments.
A Board of Trustees oversees the financial operations of the trust funds. The Board reports annually to the Congress on the financial status of the trust funds.
By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are “special issues” of the United States Treasury. Such securities are available only to the trust funds.
In the past, the trust funds have held marketable Treasury securities, which are available to the general public. Unlike marketable securities, special issues can be redeemed at any time at face value. Marketable securities are subject to the forces of the open market and may suffer a loss, or enjoy a gain, if sold before maturity. Investment in special issues gives the trust funds the same flexibility as holding cash.
Data on trust fund investments provide a breakdown by interest rate and trust fund for any month after 1989.
Somewhere in here we could have a discussion about whether the government is really making money, in inflation-corrected terms. It would seem that the interest rate (1.85% in April of 2012) is much better than what a large bank offers to its depositors. On the day we checked, Bank of America was only paying 0.45% to its CD holders.
What skews the whole equation, however, is monetary inflation (printing more money) which is happening at a fairly good clip most of the time and a fairly accurate reconstruction of the Federal Reserve’s M3 rate (which the Fed ever-so-conveniently stopped reporting to the public in the Alan Greenspan period) reveals that the Federal Reserve’s broad measure has been going up in recent weeks at about 5.0%.
What most people don’t realize is that by having a high inflation rate (the printing rate of the money) that’s going up faster than the interest rate the government “charges itself” for interagency borrowing, the real purchasing power of the Social Security funds is falling behind the real rate of (money-printing) inflation.
Now, is that slick, or what?
Well, not if we’re ever expecting to get back a decent return on what we all poured in to social security, but that’s another article. Sorry to mix both the short-term returns and the long-term federal money-dilution scheme into a single ball of wax, but there you have it.
If you average out the first 99-years of the Federal Reserve, the money printing has average 3.24 percent per year over the period. Few bother to run out the numbers, but with the Fed M3 increasing at about 5% and Social Security interagency paper under earning less than 2%, well let’s just say that Social Security Trust fund is not keeping even on. It may be doing better than most banks, but the money dilution machine is still problematic.
Soaring healthcare costs is another concern, not so much because Medicaid doesn’t work – it does – but it doesn’t cover everything , and that’s yet another consideration going into retirement, especially if there’s a history of chronic, long sunset diseases like Alzheimer’s or a slow form of cancer in your genetic makeup.
We could delve into this more, but to some extent the future of healthcare is in the hands of the US Supreme Court, so we’ll let this one sit, but note in passing that it’s another problem people thinking of retirement have to deal with.
For people who were doing well, the serial market declines, first in the 2001-2003 period, and more recently from the 2008 through 2009 period had a huge impact. A few people managed to also be led into the financial slaughterhouse by being caught with over-levered real estate, too, since that was one alternative some couples put money into thinking it would “all work out.” It hasn’t and in our opinion, it won’t.
Bank Failures and More
We’ve all heard in the news about failures in the banking industry – they’ve been pretty well plastered all over the press and at the www.fdic.gov website. But what we don’t hear hardly anything about is the goings on at the Pension Benefit Guaranty Corporation, the government backstop to pension plans.
The agency issued a press release – way back in November of 2011 – which included this somber note:
‘Most private pensions are sound,’ said PBGC Director Joshua Gotbaum, ‘but some are real sources of concern. We want to make sure they can restore themselves, and that PBGC has the resources to help.’
The exposure report provides projections on the future status of private pension plans and their effect on PBGC’s financial status. The projection, as of Sept. 30, 2010, in PBGC’s single employer program was for a deficit of $24 billion in 2020, an increase from the program’s $21.6 billion deficit on that date. There is nothing good about that.
Concerns About Some Multiemployer Plans
For the multiemployer program, the deficit was projected in the same period to reach $9.4 billion up from $1.5 billion.
Projections in the report show a nearly 30 percent chance that PBGC’s multiemployer program will run out of money entirely within 20 years. As of FY 2010, the multiemployer program had $1.6 billion in assets to cover $3.1 billion in existing liabilities.
Many multiemployer plans remain financially sound. Financial distress in the multiemployer program stems from funding shortfalls of a few large multiemployer plans.
Unlike single-employer plans, PBGC does not acquire the assets of multiemployer plans, but instead must wait until they are completely insolvent before beginning to fund benefits. Computer simulations from the agency’s Pension Insurance Modeling System project that the multiemployer program has a 6 percent chance of becoming insolvent by 2020, and a nearly 30 percent chance of insolvency by 2030.
Single-Employer Program Projected Steady During Next Decade
PBGC performed 5,000 simulations on the future of the single employer program, which has $78 billion in assets to cover $99 billion in pension benefits. The average projection showed an increase in future program deficits to $24 billion. None of the computer simulations projected the program to run out of money in the next 10 years.
Sounds hopeful, but remember that many of the pension projections are based on government outlooks for the economy, which we have to red flag since they haven’t been horribly accurate lately, it seems.
So what does it all come down to?
In general, we could argue a number of factors are in play, but the most interesting one to us (since the two G’s live well under our incomes and live a more sedate ‘strategic’ lifestyle than peers) is that most people blow retirement by not keeping their lifestyle under control.
A 2010 paper by the Census Bureau (“Can Americans Afford to Retire?”) sums up the paradox this way:
This seemingly paradoxical result can be explained by the fact maintaining pre-retirement standard of living might be more difficult for higher income groups. In addition, the top third includes people with median earnings of $100,000, which means that the households that fall into the top third category are not necessarily well-off (Munnell, et. Al., 2006).
More importantly, we believe this result could very well be due to omission of housing from our calculation of wealth. Likewise, we believe that once we take housing into account in our calculations of replacement rates, this result will be drastically different.
Or, it may not. The reason being that much of the paper wealth of once upper-income people has evaporated at a pretty good clip due to the declines in real estate which, though we keep hearing promises of green shoots and good times ahead, have been largely a mirage so far.
That Census paper is a lot more optimistic than we are. An increasing number of Americans are growing skeptical, with one post noticing that “Company(s) illegally underfunds their Pension Fund…Keeps the money…Claims bankruptcy…Government picks up the pension obligation…Company reorganizes…cuts wages…Public pays for it all.”
Summing It All Up
So no matter how much we made – and thought we had saved – until the house is paid off and a “car for life” is paid, too . . . and there’s dough in the bank for taxes and excess medical not covered by Medicare . . . an increasing number of “over 60s” are getting a wee bit cranky about being worked to death.
Now lucky for us – the Two Gs – we have met the requirement to have paid-up homes and a couple of paid-up cars for life. Still, we both put in work weeks of 40 hours or more. So yes, to us, retirement is just a myth. And yes again, working to death is the new reality.
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