As Nest Eggs Decline, Darkness Falls On Twilight Years

For many people, the following images represent the dreamy existence they look forward to when their working lives are over:

(Source: http://www.guardian.co.uk/society/2007/jun/27/guardiansocietysupplement3)

(Source: http://farm4.static.flickr.com/3512/3247847941_61ab66cfde.jpg)

(Source: http://www.missionlagunahomes.com/account/acc_files/10000/4258/Golfers(5).jpg)

(Source: http://www.cypressglenretirementcommunity.com/twocouples1.JPG)

But a lifestyle like this depends on having enough of a nest egg to live on. According to the following post from Economist.com’s Free exchange blog, “The Day of Reckoning,” that could prove to be an unattainable goal for many Americans.

FIRST the good news: many American baby boomers have been saving enough for retirement. So says a paper by John Karl Scholz and Ananth Seshadri. Rather than look at replacement rates (the ratio of retirement to working income) they measure how much wealth you need to fund desired consumption in retirement.

Now the bad news: that estimate uses data from 2004. The paper measures wealth using stocks, bonds, mutual funds, defined contribution pension assets, and housing wealth. We know how that went.

Housing wealth makes up the largest share of most American’s investment portfolios. According to a 2007 survey of consumer finances, the other large piece of wealth comes from assets in private pension accounts. These tend to be heavily invested in equities. About half of 401(k)/403(b) participants over the age of 60 invested more than 50% of their account in equity.

Even if baby boomers dutifully saved and were on track for a comfortable retirement two years ago, they’ve taken a big hit. They will have to work longer, but it will be a very long time before the value of their home and stock portfolio reaches 2007 levels.

The fall in personal assets means Americans will find themselves more dependent on state benefits. This incredibly bleak CEPR paper finds that the real estate crash will leave many Americans almost totally reliant on Social Security. Of course, the cohort they use is between the age of 45 and 54. People closer to retirement tend to have more equity in their homes. Also the study assumes people sell their homes in 2009. It does not allow for the option of staying in your house and not paying rent to someone else. In that respect your primary residence pays you a dividend. A new retiree may opt to not sell their house at the bottom of the market and continue to receive dividend payments instead. The same can be said of their stock portfolio. But, even under the most favourable assumptions, it’s a pretty ugly situation.

The administration is hoping to cut entitlement spending, but at least for baby boomers, this does not look realistic. The Great Depression spawned Social Security in an effort eliminate old-age poverty. It will be interesting to see what happens to the programme now.

To make matters worse, as Mish’s Global Economic Trend Analysis writes in “Social Security: There Is No Trust; There Is No Fund,” many people will eventually find that they don’t even have a government-sponsored safety net to fall back on.

Social Security is back in the limelight where once again its problems will no doubt be ignored.

Please consider Recession Puts a Major Strain On Social Security Trust Fund.

The U.S. recession is wreaking havoc on yet another front: the Social Security trust fund.

With unemployment rising, the payroll tax revenue that finances Social Security benefits for nearly 51 million retirees and other recipients is falling, according to a report from the Congressional Budget Office. As a result, the trust fund’s annual surplus is forecast to all but vanish next year — nearly a decade ahead of schedule — and deprive the government of billions of dollars it had been counting on to help balance the nation’s books.

The Treasury Department has for decades borrowed money from the Social Security trust fund to finance government operations. If it is no longer able to do so, it could be forced to borrow an additional $700 billion over the next decade from China, Japan and other investors. And at some point, perhaps as early as 2017, according to the CBO, the Treasury would have to start repaying the billions it has borrowed from the trust fund over the past 25 years, driving the nation further into debt or forcing Congress to raise taxes.

My Comment: Therein lies the rub. There is no fund per se. It’s all been spent, and then some.

“It suggests we better get working on Social Security and stop burying our heads in the sand,” said Sen. Judd Gregg (N.H.), the senior Republican on the Senate Budget Committee. “The Social Security trust fund, though technically in balance, is going to put huge pressures on taxpayers very soon.”

My Comment: There is negative money in the fund so it’s complete nonsense to claim it is “technically in balance”.

Many liberal analysts reject the notion that Social Security needs fixing, arguing that the system is projected to fully support payments to beneficiaries through 2041 — so long as the Treasury repays its debts.

My Comment: “…So long as the Treasury repays its debt” And exactly how likely is that? Has anyone looked at Obama’s budget?

The trust fund has long taken in more in revenue from payroll taxes and other sources than it pays out in benefits. Last August, the CBO predicted that surplus would exceed $80 billion this year and next, then rise to around $90 billion before slowly evaporating by 2020. But the rapidly deteriorating economy — particularly the loss of more than 4 million jobs — has driven those numbers much lower much faster, with the surplus expected to hit $16 billion this year and only $3 billion next year, then vanish entirely by 2017.

In his budget, Obama predicted that the trust fund surplus would hit $30 billion this year, according to Mark Lassiter, a spokesman for the Social Security Administration.

But that number, too, is far less than the $80 billion the trustees had forecast for 2009. In addition to declining revenues, Lassiter said the system is likely to incur higher expenses due to big jumps in new retirement and disability claims. Both are expected to rise by at least 12 percent this year compared with 2008.

My Comment: Can we stop with the nonsense? Revenues exceed payouts but that does not mean there is a fund. Every penny and then some has been borrowed and spent. And even the so called surplus is falling like a rock, a decade faster than expected.

Obama’s $9.3 Trillion Budget Deficit

Inquiring minds are pondering Obama budget could bring $9.3 trillion in deficits.

President Barack Obama’s budget would produce $9.3 trillion in deficits over the next decade, more than four times the deficits of Republican George W. Bush’s presidency, congressional auditors said Friday.

The new Congressional Budget Office figures offered a far more dire outlook for Obama’s budget than the new administration predicted just last month - a deficit $2.3 trillion worse. It’s a prospect even the president’s own budget director called unsustainable.

The dismal deficit figures, if they prove to be accurate, inevitably raise the prospect that Obama and his Democratic allies controlling Congress would have to consider raising taxes after the recession ends or else pare back his agenda.

By CBO’s calculation, Obama’s budget would generate deficits averaging almost $1 trillion a year of red ink over 2010-2019.

Worst of all, CBO says the deficit under Obama’s policies would never go below 4 percent of the size of the economy, figures that economists agree are unsustainable. By the end of the decade, the deficit would exceed 5 percent of gross domestic product, a dangerously high level.

Most disturbing to Obama allies like Senate Budget Committee Chairman Kent Conrad, D-N.D., are the longer term projections, which climb above $1 trillion again by the end of the next decade and approach 6 percent of GDP by 2019.

The worsening economy is responsible for the even deeper fiscal mess inherited by Obama. As an illustration, CBO says the deficit for the current budget year, which began Oct. 1, will top $1.8 trillion, $93 billion more than foreseen by the White House. That would equal 13 percent of GDP, a level not seen since World War II.

Trust Fund Projections

click on chart for sharper image

Let’s return to the ridiculous claim made by analysts: Many liberal analysts reject the notion that Social Security needs fixing, arguing that the system is projected to fully support payments to beneficiaries through 2041 — so long as the Treasury repays its debts.

For starters it is clear to see the 2041 figure is nonsense. And given that every cent of the fund has been spent, exactly how is the treasury supposed to repay that fund in light of $9.3 trillion (with a T) budget deficits when the “surplus” is a mere $16 Billion (with a B)?

Finally, why does everyone continue the charade of calling Social Security a “trust fund” when it’s clearly not a fund and there cannot possibly be any trust in it?

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Comment by carol stanley

2009-04-04 08:09:59

Another article on the issues of retirement. Frankly and unhappily they are all valid. Many honest people have been saving, planning and dreaming about retirement…golf, tennis, the beach, and just fun and travel. They may retire but not in that style. Scrimping and saving will be the two “s” conversation. Hopefully things will turn around in the next few years…and things will be regained to some degree.

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