Retirement Crisis?

[doodle]

So, how will our country deal with the large number of broke baby boomers? How do you think this story plays out over the next decade? What is the affect on investments?

The Employee Benefit Research Institute (EBRI) has published its annual Retirement Confidence Survey which confirms what virtually all such surveys have concluded: 1) that Americans are living longer; and 2) that they do not have anywhere near enough saved for retirement.

The sad truth is, Americans do almost no thinking about what kind of retirement they want. They mistakenly assume that Social Security is a retirement program, when in fact it is a supplemental retirement program. The three legs of the retirement "stool"—Social Security, a pension, and private savings—have all seen some shrinkage in the past few years.

For Social Security, all baby boomers know the truth: We are going to be working longer, into our 70s, paying more and getting less. Pensions are going away: International Business Machines stopped providing pensions to new employees a couple years ago, and many are facing reductions in their benefits.

(Read More: Cities That Are Most Prepared for Retirement)
And private savings? Let me quote from the EBRI survey: 57 report having less than $25,000 in household savings and investments (excluding their home and pension benefits). This is for all workers, so older workers would have more money, but other surveys show the results are equally paltry.

This is just the tip of the iceberg: American households are so strapped that only half could come up with $2,000 in cash if an unexpected need arose in the next month.

(Read More: Choice for Tight Times: Save More or More Risk)

You would think that savings levels would increase, but no: The percentage reporting saving anything for retirement is at 66 percent, down from 75 percent in 2009.

People are also living much longer than their parents: A male reaching retirement age in 2013 is expected to live to an average of 85, a woman to 87.

What this means: A retirement crisis is looming. In a little more than a decade, there will be a lot of older people who will run out of money. There will be stories written in the year 2025 about Joe Smith, 82, a retired auto worker, living in a flophouse on $2,100 a month in Social Security after his pension was cut off and his personal savings ran out, while his children, in their 60s themselves, moved 2,000 miles away.

[Libertarian666]

Anyone who relies on the government to bail him out of his lack of savings is in for a world of hurt.

Anyone who relies on the financial industry to manage his money for him is in for a world of hurt.

[annieB]

Few,if any folks doing physical work can work past the age of sixty.
But we are determined to raise the retirement age.
We want them to save for retirement while they are
trying to make it thru the month.

In my previous life in real estate,80% were one missed check
from serious problems.

[doodle]

The irony is that if these Boomers all start to cut back and save, our consumption based economy will crash which will drive even more people into poverty. I think we are going to have to engineer our way out of this by tweaking the system. The paradox of thrift kind of stymies us from solving this problem within the context of the present monetary architecture.

[Libertarian666]

The irony is that if these Boomers all start to cut back and save, our consumption based economy will crash which will drive even more people into poverty. I think we are going to have to engineer our way out of this by tweaking the system. The paradox of thrift kind of stymies us from solving this problem within the context of the present monetary architecture.

There is no "paradox of thrift"; that is Keynesian nonsense. You cannot spend your way out of debt; you can only save your way out.

The only way to work out of this without a crash is that people need to save much more, and the government needs to spend much less.

Of course, what will almost certainly happen instead is that we will have an exponential increase in debt leading to a crack-up boom, in which almost everyone will be wiped out financially, followed by a new monetary system based on gold.

[moda0306]

The irony is that if these Boomers all start to cut back and save, our consumption based economy will crash which will drive even more people into poverty. I think we are going to have to engineer our way out of this by tweaking the system. The paradox of thrift kind of stymies us from solving this problem within the context of the present monetary architecture.

There is no "paradox of thrift"; that is Keynesian nonsense. You cannot spend your way out of debt; you can only save your way out.

Really?  No paradox of thrift?

The whole idea of the second part of your comment is that you're working in an open system... and the US is mostly a closed system.  One persons debt is another person's asset.  One person's expense is another person's income.

You may have a problem with Keynesianism on moral grounds, or think that it results in malinvestment of sorts, but to say that there is no paradox of thrift is a bit ridiculous.  We can't all just stop spending at once and apply the same rules as if only one person were to get their budget in order.

In the end, Savings = Investment.  You can't have a claim on productive capacity without productive capacity.  If we're worried about the Savings side of things (the number of fiat dollars in peoples' bank accounts that they aren't spending), then government deficits are exactly what we need, because the private sector can't create savings on its own without investment, something it won't do adequately until demand is sufficient... so if we're worried about Investment, then, we need to create an economy where it is encouraged and reinforced by demand.  The latter is the main problem with our current economy.  We could cut taxes on the wealthy, slash regulations, and we'd still be left with existing investment met by too little demand... which isn't good for investment prospects in the least, and therefore, once again, demand needs to rise.

So in the end, our private sector Savings problem is a demand problem.  Period.  You can't say that our debt is a liability, but then claim that our fiat assets are just worthless confetti.  It's nonsense.

[RuralEngineer]

I'm sure that Uncle Sam will come to the rescue with a combination of reduced social benefits for the broke boomers and increased theft from my generation (Millennials) in the form of much higher taxes.

Alternatively they could address it through deficit spending, which at some point would lead to hyperinflation, the most regressive form of taxation ever.

Either way, individual responsibility will still be dead and I'll still be on the hook for a bunch of people I neither know nor care about rather than being able to primarily look after my own family (parents, grandparents) first and fore most.

[AgAuMoney]

It is not nonsense.

Do a thought experiment.  Let's pretend you are the magic savings-inducing employee.  Let's say everyone who buys stuff from the place where you work decides to cut their purchases by 50% in the coming year.  They're saving!  Yay!

What will happen to your job?  To your pay?

OK, you find a new job.  But your powers are relentless, and your new company's customers decide to cut their purchases by 50%.

What then?

Oh, it most certainly is nonsense.

Growth is built upon savings, the accumulation of capital.  That is why they call it capitalism.

As long as "money" is freely created, the centrally planned economy is going to work just as well as other centrally planned economies always have.  Booms and busts are built upon ex nihilo money creation, with its accompanying misallocation of resources and debt driven consumption until people cannot borrow and spend any more.

So what are they going to do with their savings that they are no longer spending?  Bury it in their backyard?  Maybe if they were gold bugs or following the PP they might bury all or some of it.  But really, what are they going to do?

Let's say they put it in the bank.  The bank has more money to lend.  Rates fall.  A young couple just getting started can now afford to take out a loan to fix up or add onto their house, with a long earning lifetime ahead of them to pay it off.  More spending.

Or actually, maybe by saving what they are doing is paying down debt, i.e. their maxed out credit cards.  As they pay off their cards, the issues have more money to lend.  See above.  Plus, they soon have the cards paid off, and without paying 20% interest they realize they can spend at least 1/2 of what they were doing before they maxed out, without going into debt.  More spending than when they were maxed out, with less misallocated capital because their spending is conscious instead of conspicuous.

Or perhaps they put the money into the stock market, providing needed capital for businesses to expand into south america and asia.  Your business, in fact.  They give you a chance to take a promotion to head the new Asian office on a 2 year assignment in Singapore, with housing provided in addition, of course.

[melveyr]

Something to keep in mind... the models where the paradox of thrift doesn't exist have never been able to explain unemployment. They usually start with the assumption that everything is fully employed in the first place! Try listening to a neoclassical economist try and explain the great depression without laughing.

Also, deposits do not create loans. Loans create deposits. This blog post does a pretty good job of explaining it:
http://www.winterspeak.com/2009/09/loan ... banks.html

The way the system actually works is quite unintuitive and many economists get it wrong. However, they are too late in the career to pull a 180 and so they just keep creating models that describe a world that we don't live in. Luckily us posters on this forum don't have a big reputation to uphold so we can just seek the truth. I think the truth is important because we have real money on the line that is operating in the real world. The PP is all about understanding the possibilities in our fiat economy and positioning yourself that you are always protected, so I find this stuff extremely relevant.

[AgAuMoney]

Also, deposits do not create loans. Loans create deposits. This blog post does a pretty good job of explaining it:
http://www.winterspeak.com/2009/09/loan ... banks.html

In the broken system we have now...  Which has lost 95% of the value of the dollar over the past 100 years and which 100 years has not coincidentally experienced the most serious and longest lasting recessions since the nation began.

Only fiat money can be created by debt.

Real money has to exist before it can be lent.

[AgAuMoney]

Oh, forgot to mention, but winter's blog forgets to mention that deposits create the capital which is what is required by the "capital requirements" he so blithely assumes to be the limit on lending.

[annieB]

So,who is going to be in charge of this near alchemy machine?
There are downsides and who will take the punchbowl away?

[notsheigetz]

Loans do not require deposits.  See http://pragcap.com/banks-are-not-mystical.

Actually, BANKS create money.  In fact, banks create far more money than the government deficit spending does.

Makes me wonder why they used to pay interest on deposits. Sounds like that was all a charade and they are finally giving it up.

[Kriegsspiel]

Loans do not require deposits.  See http://pragcap.com/banks-are-not-mystical.

Actually, BANKS create money.  In fact, banks create far more money than the government deficit spending does.

You Austrians are a hoot.  Does the Sun still orbit the Earth by your reckoning?

It still doesn't make sense (to me).  What money are banks lending then? 

[doodle]

From my understanding the bank creates the money out of thin air based on a promise by the borrower to pay it back with a certain amount of interest by a certain date. It is only months later that the bank has to find the reserves to back up their outstanding loans. This is backwards from how people commonly conceive of banks operating.

Money in its original conception really is just debt when you think about it. If I want to buy a cow from you in a world without government fiat or commodity money, I would take the cow and leave you an IOU saying that I would pay you back a cow in the future. That IOU is then money if that person can trade it against other goods or services, but it is also my debt. When I pay that debt off by giving someone a cow, that money (IOU) disappears.

[moda0306]

Loans do not require deposits.  See http://pragcap.com/banks-are-not-mystical.

Actually, BANKS create money.  In fact, banks create far more money than the government deficit spending does.

You Austrians are a hoot.  Does the Sun still orbit the Earth by your reckoning?

It still doesn't make sense (to me).  What money are banks lending then?

It's essentially their own money which is backed (usually) by some physical asset... a business, a home, a car, a building, etc... Banks, when they can make loans to credit worthy customers, essentially have the capital essential to get the fed around their arbitrary reserve ratio limitations.  There are soft constraints to this expansion of money, but the system essentially resembles asset-backed credit money created by banks.  Outside money (cash an reserves) are essentially a clearing mechanism to grease the "real money" system that requires some productive potential to back the creation of it.

[doodle]

Loans do not require deposits.  See http://pragcap.com/banks-are-not-mystical.

Actually, BANKS create money.  In fact, banks create far more money than the government deficit spending does.

You Austrians are a hoot.  Does the Sun still orbit the Earth by your reckoning?

It still doesn't make sense (to me).  What money are banks lending then?

It's essentially their own money which is backed (usually) by some physical asset... a business, a home, a car, a building, etc... Banks, when they can make loans to credit worthy customers, essentially have the capital essential to get the fed around their arbitrary reserve ratio limitations.  There are soft constraints to this expansion of money, but the system essentially resembles asset-backed credit money created by banks.  Outside money (cash an reserves) are essentially a clearing mechanism to grease the "real money" system that requires some productive potential to back the creation of it.

What do you mean by their own money? If I want to buy a car and go to the bank for a loan for 10,000 dollars, the bank creates that money and the collateral is the car that I bought. If I dont pay, the bank reposseses my car. The bank has done nothing other than act as a goverment sanctioned intermediary which is supposed to confirm whether I have the capacity to pay back the loan. Other than just making sure Im good to pay the loan back, what other function does a bank truly have? If we eliminate credit, is there any role for banks to play in our system?

[moda0306]

doodle,

Everything you said is almost perfectly correct, IMO... but you'll notice that the "sanction" had a lot more to do with whether you could pay back the loan (an even yet more to do with whether they had a physical asset to grab if you don't), than it had to do with an arbitrary amount of reserves.

When I say "their own" money, I am simply identifying that they're not taking the government money and lending it out so much as creating separate money because you have an asset and ability to pay back the loan.

In some ways, this is how it should work.  Why would we want our productive capacity to be limited by some arbitrary amount of reserves and an arbitrary reserve ratio. 

However, banks have perverted the process and found ways to offload bad loans back onto our very own 401(k) plans for us to invest in! (MBS's)

[doodle]

However, banks have perverted the process and found ways to offload bad loans back onto our very own 401(k) plans for us to invest in! (MBS's)

Which is why so many people are trying to return banking to the boring and unimaginative business role that society needs it to fufill. I wonder if we will ever get the monster back into bag. If you ask me, the root of a lot of these evils is a focus on quantitative economic stats instead of qualitative ones. Banks are simply the crack dealers to a consumption driven society out of control.

[doodle]

I might have misused the term Qualitative economics...what I am trying to say is that a healthy economy cannot be solely measured by production stats and growth numbers. There is a social and human dimension that is being left out. Buying xanax and getting bariatric surgery add to GDP when a reasonable person would think that such negative things should be subtracted from a measure that we use to cite our economic dominance.

[moda0306]

doodle,

Well we live in an odd world where we're all staring at each other to set our own priorities.  We know the cost of everything but the value of nothing (in a vacuum).  We value a lot of things we have based on our expectations about what others will value next month/year/decade.

Whether you're a bank, government, individual, or business, it is probably tough to decide what a sound investment truly is in an economy that's built on so much interdependence and groupthink.  I think that's part of the problem.

I trust the private sector more than the public sector to lend money at appropriate rates for the appropriate ideas, with a few exceptions (I like SBA loan type programs and loans for vets, but that's instinctual and not based on a detailed study on the cost/benefit).  That said, you can't have monopolistic powers developing, moral hazards galore, and loans bouncing around like hot potato.  Further, personally, I don't think a system based on a limited quantity yellow metal, reserve ratios, and depositors at-risk is ideal by any means, so so some private/public partnership (as gag-inducing as that term may sound) is probably the best way IMO.

[moda0306]

I might have misused the term Qualitative economics...what I am trying to say is that a healthy economy cannot be solely measured by production stats and growth numbers. There is a social and human dimension that is being left out. Buying xanax and getting bariatric surgery add to GDP when a reasonable person would think that such negative things should be subtracted from a measure that we use to cite our economic dominance.

I say keep it in GDP, but realize GDP doesn't indicate good decisions are being made.  Value judgements aren't my style when it comes to things like GDP.

[MachineGhost]

So in the end, our private sector Savings problem is a demand problem.  Period.  You can't say that our debt is a liability, but then claim that our fiat assets are just worthless confetti.  It's nonsense.

Careful, you're drinking the Neo-Keynesian MMT a bit too liberally.

The "paradox of thrift" and deficit spending is based on flawed reasoning by Keynes.  Specifically, he assumes that investment is fixed and that people will save a larger portion of their incomes in a recession.  The claimed net effect is that an increase in private savings would equal a decrease in investment because both have to be equal in the econometric formula.

In the actual real world, only stimulating real investment will work in the long run to reduce deficits and increase consumption.  When both consumers and goverment increase their savings, governments engage in a race to the bottom currency devaluations/trade wars and practical deficit spending limits are hit by governments, that is the only option left that will actually work.  Four years later, it should be evident by now.

[Libertarian666]

If I sell goods and/or services for 10 ounces of gold and consume only 9 ounces worth, then I have a choice about what to do with the additional ounce I have left over:

1. Put it in a safe place for use later;
2. Lend it to someone else, with the intention of getting back more later when the borrower has produced or saved enough to pay me back.

Neither of these requires inventing "money" out of thin air, and there is no "paradox of thrift" involved.

Anyone who doesn't understand this should read Man, Economy, and State by Murray Rothbard immediately.

(There is a problem if the rate of interest is higher than the rate at which the lenders consume the interest, because then there is no way for aggregate lending to be repaid, but this is not a "paradox of thrift".)

[melveyr]

If I sell goods and/or services for 10 ounces of gold and consume only 9 ounces worth, then I have a choice about what to do with the additional ounce I have left over:

1. Put it in a safe place for use later;
2. Lend it to someone else, with the intention of getting back more later when the borrower has produced or saved enough to pay me back.

Neither of these requires inventing "money" out of thin air, and there is no "paradox of thrift" involved.

Anyone who doesn't understand this should read Man, Economy, and State by Murray Rothbard immediately.

(There is a problem if the rate of interest is higher than the rate at which the lenders consume the interest, because then there is no way for aggregate lending to be repaid, but this is not a "paradox of thrift".)

Which country do you live in and in what year?