Tag Archives: Savings

New study: most Americans have not saved enough for their retirement

Building a castle isn't easy - it takes work
Building a castle isn’t easy – it takes work

This story is from CNBC, and I hope it causes you young people to count the cost of your plans.

It says:

A new GAO analysis finds that among households with members aged 55 or older, nearly 29 percent have neither retirement savings nor a traditional pension plan.

“There hasn’t been a significant increase in wages, people have student loans and other debt, and many are continuing to struggle financially,” said Charles Jeszeck, the GAO’s director of education, workforce and income security, which analyzed the Federal Reserve’s 2013 Survey of Consumer Finances to come up with its estimates. “We aren’t surprised that people have not saved a lot for retirement.”

Even among those who do have retirement savings, their nest eggs are small. The agency found the median amount of those savings is about $104,000 for households with members between 55 and 64 years old and $148,000 for households with members 65 to 74 years old. That’s equivalent to an inflation-protected annuity of $310 and $649 per month, respectively, according to the GAO.

Americans underestimate how much money is needed in order to retire:

Estimates about the size and scope of the retirement savings problem vary widely, the GAO found. In addition to examining the Survey of Consumer Finances, it reviewed nine studies conducted between 2006 and 2015 by a variety of organizations, including academics, benefits consultant Aon Hewitt, the Employee Benefit Research Institute (EBRI) and the Investment Company Institute. Based on these reports, it concluded that one-third to two-thirds of workers are at risk of falling short of their retirement savings targets, in part because of the range of assumptions about how much income is required in retirement.

Given that we have been inflating the currency and running low interest rates for the last few years, any savings you have will buy less than they buy today.

Here’s another really key point:

The research that the GAO examined consistently showed that people aged 55 to 64 are less confident about their retirement and plan to work longer to afford retirement. However, a 2012 study by the EBRI found that about half of retirees said they retired earlier than planned because of health problems, changes at their workplace or having to care for a spouse or another family member. This suggests “that many workers may be overestimating their future retirement income and savings,” wrote GAO researchers.

Got that? When young people make plans about the future, they underestimate the risks and overestimate their own abilities.

Don't rely on Social Security, young snowflakes
Don’t rely on Social Security, precious little snowflakes

Investors Business Daily has been posting a lot about Social Security, and they are saying that payouts are going to be dropping sooner than you think.

Look:

Every year, the Social Security Administration releases its Trustees Report, which projects the program’s solvency — how much it will take in, how much it will pay out and how long the “trust fund” can cover revenue gaps — over the next 75 years.

The latest report says that Social Security can meet its financial obligations for about 18 more years. After that, the trust fund will be exhausted, and payroll taxes won’t cover nearly all the benefit costs.

That’s bad enough. But a new study by researchers at Harvard and Dartmouth shows that this day of reckoning will almost certainly come far sooner than that.

The authors compare previous Trustees Report forecasts about life expectancy, fertility rates and other variables to actual results. They found that these forecasts have grown increasingly unreliable.

Worse, since 2000 “the direction of the biases are all in the same direction, making the Social Security trust funds look healthier than they turned out to be.”

For example, Social Security has been consistency underestimating life expectancy, which means that people are living and collecting benefits for longer than predicted. Underestimating life expectancy by just 1.3 years leads to 150,000 more people collecting benefits than predicted, the researchers note.

The Trustees Report has also overestimated the nation’s fertility rate. In 2010, for example, 315,000 fewer children were born than predicted. This error makes the population look younger, which in turn makes Social Security’s financial outlook seem healthier.

Likewise, the report has consistently overestimated the Trust Fund’s assets and solvency.

Many of these forecasts are so bad that the actual results are often worse than the report’s “worst case” scenario, which currently has the program becoming insolvent in just 14 years.

Don’t be depending on Social Security if you are under 50 – it’s not going to be there for you, even though you’re going to be paying into it.

When young people imagine what the future will be like, they almost always underestimate the things that can go wrong. They are so optimistic and inexperienced, that they simply can’t conceive of the possible setbacks, and calculate the probabilities of these occurring. The best way to get around this is to talk to someone who is good at doing what you are trying to do. When I was training as a software engineer, I actually had to take classes in software design to learn how to identify unexpected scenarios. This is because engineers start off the same as everyone else – optimistic. We have to train ourselves to identify dependencies and risks. This is how you design software – by thinking not just of common usage scenarios, but also unexpected disaster scenarios, like power failures and data transmission interruptions and database failures. When it comes to earning and saving money, don’t talk to your inexperienced young friends. Talk to someone a little older who has already been through it, and who is doing a good job at it.

Thomas Sowell: could a Cyprus-style confiscation of private savings happen here?

Thomas Sowell, an economist for the people
Thomas Sowell, an economist for the people

Surprise! It already is happening here. Thomas Sowell explains in the American Spectator.

Excerpt:

One of the big differences between the United States and Cyprus is that the U.S. government can simply print more money to get out of a financial crisis. But Cyprus cannot print more euros, which are controlled by international institutions.But could similar policies be imposed in other countries, including the United States?

Does that mean that Americans’ money is safe in banks? Yes and no.

The U.S. government is very unlikely to just seize money wholesale from people’s bank accounts, as is being done in Cyprus. But does that mean that your life savings are safe?

No. There are more sophisticated ways for governments to take what you have put aside for yourself and use it for whatever the politicians feel like using it for. If they do it slowly but steadily, they can take a big chunk of what you have sacrificed for years to save, before you are even aware, much less alarmed.

That is in fact already happening. When officials of the Federal Reserve System speak in vague and lofty terms about “quantitative easing,” what they are talking about is creating more money out of thin air, as the Federal Reserve is authorized to do — and has been doing in recent years, to the tune of tens of billions of dollars a month.

When the federal government spends far beyond the tax revenues it has, it gets the extra money by selling bonds. The Federal Reserve has become the biggest buyer of these bonds, since it costs them nothing to create more money.

This new money buys just as much as the money you sacrificed to save for years. More money in circulation, without a corresponding increase in output, means rising prices. Although the numbers in your bank book may remain the same, part of the purchasing power of your money is transferred to the government. Is that really different from what Cyprus has done?

I noticed that Brian Lilley had an article about whether Cyprus-style confiscations could happen in Canada. The short answer: yes – for amounts above $100,000 Canadian.

Obama’s fiscal cliff deal leaves us on a path to 200% debt to GDP

From The Hill.

Excerpt:

The nation’s long-term fiscal outlook hasn’t significantly improved following the recent agreement between Congress and the White House over tax and spending issues, according to a new analysis.

The “fiscal cliff” deal, combined with the debt-limit agreement of August 2011, only slightly delays the United States reaching debt-to-gross domestic product levels that would damage the economy and risk another fiscal crisis, according to a report from the Peter G. Peterson Foundation released on Tuesday.

The agreement “may have prevented the immediate threats that the fiscal cliff posed to our fragile economic recovery, but we haven’t remotely fixed the nation’s debt problem,” said Michael A. Peterson, president and COO of the Peterson Foundation.

“The primary goal of any sustainable fiscal policy is to stabilize the debt as a share of the economy and put it on a downward path, and yet our nation is still heading toward debt levels of 200 percent of GDP and beyond,” he said.

The report concludes that the recent round of deficit-reduction measures won’t make major improvements because they fail to address most of the major contributors to the debt and deficit, including rapidly rising healthcare costs. 

[…]At a House Ways and Means Committee hearing last week, lawmakers and budget experts agreed that rising healthcare costs, such as Medicare, must be addressed this year as part of efforts to overhaul the tax code and entitlement programs.

“Until spending in those areas is reduced, tax revenues are increased, or policymakers implement a combination of both, the United States will continue to have a severe long-term debt problem,” the report said.

“Reforms should be implemented gradually, and fiscal improvements must be achieved before our debt level and interest payments are so high that sudden or more draconian reforms are required to avert a fiscal crisis.”

The latest deal that stopped income tax increases for those making $400,000 a year or less may have only improved the burgeoning debt situation by a year.

Scheduled spending cuts from the 2011 budget deal, combined with the fiscal cliff agreement, put the debt on track to reach 200 percent of GDP by 2040, five years later than was projected prior to the passage of the two deals. 

The recent deficit-reduction measure gave the nation an additional year before hitting that 200 percent threshold, the report showed. 

I saw an interesting interview featuring Captain Capitalism in the Washington Times. He thinks that the debt spiral is irreversible.

Excerpt:

DDG: What was your take on the “solution” we saw earlier this month to the so-called fiscal cliff crisis?

Clarey: Band-Aid put on a cut aorta.

DDG: My concern is that inflation is distorting all levels of American society. For example, as prices skyrocket from monetary dilation at the Fed, we have this effect where as Rose Wilder Lane says, everything becomes increasingly more expensive and government starts creating laws and fines just for the purpose of revenue generation. So the formation of a police state and this loss of freedoms is in large part a result of government wanting to get more and more revenues to finance outlays that are being dilated as a result of the inflation they themselves are creating. What’s your take on this?

Clarey: I don’t know if it would be at the police state yet where the federal government comes in and confiscates wealth, as much as it is something much more clandestine. The government likes inflation in that it increases asset prices. Thus when somebody sells an asset – land, stocks, bonds, et cetera – they have to pay a capital gains tax.

Forget whether there was an actual real rate of return for the investor, the government gets to tax the real capital gains and the inflationary capital gains. Inflation also erodes the value of the federal debt, forcing the costs on US treasury holders. However, unless things change, the government will be forced [to cope with] with a simplified problem: Does it inflate its way out of its debts or does it confiscate wealth to pay for it?

I can’t read Paul Krugman and Barack Obama’s minds – if any exist – but I believe they will opt to go the inflationary route to solve the country’s debt problems. If they went the wealth-confiscation route, that would mean nationalizing people’s IRAs, 401(k)s and brokerage accounts much like they did in Argentina and Bulgaria. I fear however, because of their political ideology they have no problems doing both.

I am expecting inflation to continue in the near term, followed by seizing retirement accounts if the Democrats take back the House in 2014. The amnesty of 12 million illegal immigrants should give them that. So, if you have a plan to escape this, you’d better execute it in the two years. The clock is ticking.