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Brett Arends

Our next big crisis will be a retirement crisis

CPA & Business Professional Group CPA & Business Professional Group 42,150 members Member Information and settingsShare group DiscussionsPromotionsJobsMembersSearch Nicholas J. Lazarchick, AMP Follow Nicholas J. Our next big crisis will be a retirement crisis Nicholas J. Lazarchick, AMP Reverse Mortgage Consultant at Security One Lending; nmls # 834879 PH: 301.943.4369, nicholas@RM-Mtg.com http://www.marketwatch.com/story/our-next-big-crisis-will-be-a-retirement-crisis-2014-03-03?link=MW_retirement_popular Our next big crisis will be a retirement crisis Brett Arends's ROI marketwatch.com Without more savings and a better safety net, even relatively affluent retirees could run out of money, writes Brett Arends. Like Comment (1) Unfollow Reply Privately20 hours ago Comments 1 comment

This is a very depressing piece ... but I would argue it is articles like this that fuel our discomfort with the overall state or affairs, yet, at the same time they should not be discounted.

Modern America is all about consumption. For some reason it seems that happiness is being equated with more consumption. Consumption is the Emperor, and more consumption means more happiness. This has been the message pumped out by the advertising industry since the advertising industry was invented ... but it needs to be revisited.

The problem is that the corporate world loves more consumption, because more consumption means more sales and more profits. There are relatively few good managers that are able to make more profit with declining sales ... so therefore we have to have more advertising and more consumption.

There are times in ones life where consumption is high (relative to other times in ones life). Setting up a home for a young family requires more spending (consumption) than later on in life. Later on a lot of spending may be going on, but it is often not required spending, and the same amount of happiness could probably be obtained at a lower level of consumption.

Expensive, high consumption retirement may not be the best way to have happiness. Lifestyle that delivers happiness may not need to be really expensive. The business community wants retirees to spend like crazy because it is profitable ... but is spending like crazy the sensible thing for older people to be doing.

Some costs in old age do go up. Maintaining decent health may be one of these. The dysfunctional health payment arrangements that have been established in the health sector over the past 50 years are a huge issue and need to be addressed. The Affordable Care Act is a step in the right direction ... but nowhere near as good as it could be in large part because of the influence of some of the corporate actors who profit in this space.

The problem of old age in the United States is just a part of the broader dysfunction of the society and the economy. It is mind boggling how much of America's wealth has been transferred from the people of the United States to corporate entities who now operate to a large extent in the economies of other countries (where workplace conditions are appalling and environmental regulations non-existent).

When I started to read this article I thought the title referred to the fact that governments everywhere are in a financial bind because they will soon be bankrupt because of unfunded pension obligations. This is a crisis ... and the fact that government is not being funded at a sufficient scale by taxes is the height of irresponsibility. To the extent that government entities have agreed to higher pension payments in the future than they can afford is an issue that people and government should address. The idea that almost every government entity on the planet is heading over the financial cliff is a crisis of huge scale.

Surely these are issues that CPAs and Business Professionals should be showing some leadership on.

Peter Burgess - TrueValueMetrics
Multi Dimension Impact Accounting

Our next big crisis will be a retirement crisis

Remember how everyone sensible knew the housing market was in a bubble 10 years ago but nobody really focused on what that would mean? I wonder today if we are in a similar situation regarding retirement.

Everybody sensible knows we are facing a looming retirement crisis. Tens of millions of baby boomers are starting to retire. They are going to live in old age far longer than previous generations. Tomorrow’s grandma is going to need medical care and nursing care beyond the imagination of grandmothers of yore. Yet so few people or families have saved anywhere near enough. And our public safety net is poorly managed, ill-thought-out, and threadbare.

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But even though we know the overall picture doesn’t add up, somehow everyone keeps whistling and hoping for the best.

It reminds me of a funny poster someone put up in the offices of the Boston Herald, where I worked, back around 2005. It featured a character made of soap suds called “Mr. Housing Bubble”. He was saying, “If I pop, we’re screwed!” How we laughed.

On retirement, three new reports paint a bleak picture of what the future may look like for Americans when they retire.

For example, they may enjoy an overall standard of life well below that enjoyed by retirees in many other developed countries, according to a new analysis by money management giant Natixis (which owns bond firm Loomis Sayles, among others). Natixis looked at a broad array of measures, from economic factors to health care, and found that the U.S. ranked 19th in the world for retirees — far below countries such as Switzerland and Norway, which (apparently) have sorted themselves out, and behind most of the other leading developed nations.

“The United States narrowly holds its spot among the top 20 nations globally in its capacity to need retirement security needs and expectations,” report Natixis researchers. They looked at 20 key performance indicators across four areas: health care, material well-being, finances in retirement, and broader “quality of life” and the environment. As an illustration, Natixis notes that we rank number-one in the world — by a country mile — in health spending per capita, but we are only 33rd in life expectancy, 52nd in the number of doctors per capita, and 58th in hospital beds per person.

And, as I have observed here before, even though America in aggregate contains an enormous amount of wealth, that isn’t much help to a lot of people: We have one of the most unequal distributions of income among developed countries in the world.

Many people are also in terrible financial shape for their retirement. The Boston College Center for Retirement Research has just updated its “National Retirement Risk Index,” a measure of just how many people can expect to be financially comfortable in retirement.

It doesn’t make for happy reading. According to Boston College, based on current projections, about half the country is at risk of being unable to maintain their standard of living in retirement. Among low-income workers that rises to 60%. But it’s 40% even among the higher-income workers.

The picture has improved a bit since 2010, of course, as the economy has recovered somewhat from the financial crisis. But it remains worse than it was in 2007.

One of the stark issues that comes out of the report is how little the stock market boom has helped. As the Boston College researchers note, citing data from the Federal Reserve’s 2010 Survey of Consumer Finances, most people don’t own many stocks. Equities account for just 17% of the wealth of high earners, 6% of middle earners and 2% of low earners. Far more important is the value of housing — which has recovered much less dramatically than the stock market.

Meanwhile, by suppressing short-term interest rates, the Fed has effectively levied a harsh tax on savers who need income from short-term deposits…like retirees.

The picture is similar in a new study by the Employee Benefits Research Institute, a Washington, D.C.-based think-tank. Their Retirement Readiness Rating says that 43% of Boomers and “Generation Xers” are at risk of running out of money in retirement. Among the poorest half of the country, that number rises sharply. Among those in the poorest 25%, EBRI estimates a stunning 83% are at risk.

Do the math: According to an EBRI survey conducted last year, 66% of workers have saved less than $50,000 for their retirement. And 28% have saved less than $1,000. Good luck with that.

The most alarming news, though, is in the fine print. Even these bleak numbers are based on the most rosy financial scenarios. EBRI assumed no changes in Social Security or Medicare. It also assumed wacky financial returns: It estimated people would earn about 8% above inflation each year on their stocks and about 2% above inflation on their bonds — net of fees!

John Hailer, CEO of Natixis, calls the picture worrying. “Individuals need to be concerned about their own retirement needs, and not just be dependent on government and corporations,” he says. He notes that most people don’t even understand the problem. For example, 89% of Americans told Natixis researchers that they were on track to reach their retirement goals — but 54% of them didn’t even have a plan, and 45% of them couldn’t even define those goals.

Boston College’s Alicia Munnell, Anthony Webb, and Rebecca Cannon Fraenkel, authors of the risk-index report, warn: “The only way out of this box is for people to save more and/or work longer.” No kidding.