Darkness Falling on the 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?

Comments

[MichaelN]

Wait a minute..........Al Gore said that we have a "lockbox" that is holding the social security surplus!?! He said that EVERYTHING was alright!

Are you telling me that Al wasn't telling us the truth?!?

But of course we can believe/trust the "liberal analysts" that said that everything is fine through 2041, right?

And now it is "friends of Al" and the "liberal analysts" who are running DC.

We're doomed........unless, of course, YOU believe them!

Translated: yep, "we're doomed"!

[SS]

FA,

Nothing in your pictures are so unappealing as the mindless consumption and pursuit of pleasure - hedonism, not deep human pleasure that they suggest. As Tony Benn the English Lord tuned commoner to remain in Parliament and represent his constituents as a socialist said of this system, that It's lack of human values leads youth to search for some meaning in other directions, being unguided they easily devolve into drug use hooliganism, revolt and other marginal behaviors.

If the current crisis leads people to refocus on spiritual and human values and engage in remaking the system to the benefit of all than the crisis will have been worth the trouble and pain.

SS

[Omitted Kingdom]

Two items caught my eye in this week's The Economist, print version, Obama on the cover. First, in an article about Barney Frank and Chris Dodd, they referred to the "peasants," meaning the American middle class. Second, in another article, they stated "anger has been raised to a form of entertainment in America." Makes ya think about their 1 true attitude to the American middle class and 2. how effective, on a Nazi level, are Fox channel sideshows like Rush Limbaugh and clones plus Bill O'Reilly

[RR]

The SS trust fund is equally as real as any government bond-investing mutual fund. It is true that US governments have borrowed a lot of money from the trust fund, but that's a problem for the government, not the trust fund.

US Treasury can't default on the bond in the trust fund any more than it can default on any other bonds it has sold. At least that would have an immediate effect on the availability of funds from all other sources as well.

Is this the scenario that has been lifting US sovereign CDS premiums? Are traders betting on the US defaulting on the SS trust fund?

[DougPoretz]

There is a separate article waiting to be written (maybe I'll give it a stab) that plays on your final comment: " 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?" There are a ton of similar questions. For example, why do we call it the "Farm Subsidy Program" when 72% of the $143.5 billion US taxpayers paid to farmers over the past ten years went to the top ten beneficiaries (http://tinyurl.com/4hunmx)that hardly seem to need a "subsidy" -- maybe "political payoff fund" would be more accurate -- From 1995 - 2006, Riceland Foods of Stuttgart, Arkanas (see: http://tinyurl.com/dn96ka), about 45 minutes from Little Rock, received over $554 million; by coincidence, the number two recipient over the same number of years was Producers Rice Mill, which received about $314 million and -- guess what? -- shares the same zip code as Riceland. Riceland defines itself as "the world's largest rice miller and rice marketer" (http://www.riceland.com/). Producers Rice Mill's balance sheet (most recent available -- http://tinyurl.com/c24nqe) showed total current assets of $177 million versus current liabilities of $156 million; total assets of $242 million versus total liabilities of $166 million. Yet they need a "subsidy" program. OK -- if not "political payoff program" maybe it should be called "rice and ducks financial bonus program"). Oh, by the way, two-thirds of American's farmers and ranchers receive no direct government support (http://tinyurl.com/dbxj6x). A bunch of them probably do need subsidies.

But I digress and I do not mean to pick on the Farm Subsidy Programs -- I mean to make a point from my perspective of 40 years in the communications business. THE POINT: the reason why terms (such as "in technical balance") are used and programs are named ("subsidy program") is because the government has DNA that mandates they speak in new words and new phrases that do not necessarily actually mean what any reasonable person would expect them to mean.

This extends to all sorts of "government speak." So ... I think the first "Change" that is needed in Washington is to retitle every program to accurately describe what the program is all about, and then create something akin to the "curse jar" my mother used -- we'd have to pay $1.00 to the jar everytime we cursed. What if we created for all politicians a "lie" jar so that each time some politician used a word that amounted to a lie, they put $1.00 in a special federal fund -- given the knee jerk ability of politicians to avoid or obfuscate the truth, the fund could probably grow pretty quickly to pay down a big chunk of the debt these guys are building for us and our future generations.

In fact, I think the first step in resolving any problem is to get past denial (something that home sellers today do not generally want to do as evidenced by houses that are still too highly priced for the market realities). Well, it isn't possible to get past denial until you define the situation accurately and the first step in doing that is to use honest and accurate terms. If that is correct, we'll be near the bottom of this economic (morphing into political) crisis when we start hearing politicians and government officials cutting the bull and start actually being articulate, clear, and accurate in the language and words they use. We are far far far away from that.

[Bartman]

No, precisely the opposite, Gore said that it wasn't a lockbox.

http://www.newshounds.us/2007/10/17/remember_al_gores_lock_box_well_its_baaaack.php

"When Al Gore was running for President in 2000, one of the linchpins of his campaign was that he would take the entitlement trust funds and put them in a "lock box," thus preventing Congress from raiding the funds to pay for its pet projects at the expense of future generations. He was routinely ridiculed by the vast right wing noise machine for this idea."

[MichaelN]

Mr. Bartman,

I read your link and, admittedly, I'm confused. Did Mr. Gore ever say what, exactly, he would do with the dollars collected from FICA withholding? Unless he said something like "equities," or "gold," or "swiss francs," etc., all that would occur is that they went in to what the unitary budget calls for - special Treasury securities - which are solely IOU's. No, he said nothing substantive - just another campaign "promise" from an individual who lives in a house which has a carbon footprint larger than many small towns - yes, he is a "global warming" hypocrite.

I AM a conservative and what I saw done by the prior administration and Congress (Republican) was horrific. However, the only concern that I ever heard raised by ANY Democrat politician was "you're not spending enough!"

My worries regarding Democrat control are now being proved daily by Pelosi, Reid, Frank, Dodd, Durbin, Oberstar, Obey and Obama - many who were top recipients of campaign dollars from AIG, FNMA and FHMC. How did the residents of NYC, Greenwich, New Jersey vote? What state does Senator "I'm going to bankrupt IndyMac" Schumer represent? And we expect their elected representatives to do anything but pontificate?

We have the wolves guarding the henhouse and it is going from poor political leadership to worse.

[mary]

If soc sec goes, this so-called govt. is finished - then they had better pack their bags and head on out - The crooks are in charge and they may try to default on their obligations to the people, but if they do, it is over - and they know it. Even the zombies will sit up and notice if this were to happen and that will be that. They will have no credibility left - all will see that the emperor has no clothes...and no soul - of course we already know that.

[scottt]

yea , when Mr. Redneck's momma doesnt get her social security check, something somewhere is gonna blow up .
And then its off to the detention camp for Mr. redneck but there are sooooo many Mr.Rednecks .

Personally, I cant wait to see my first $1 billion bill , and , but , and I think everything 'might ' be ok until then ?

[Erich Riesenberg]

Ah, two Michaels.

MichaelN, you truly have never heard of a fiscally responsible Democrat? Okay, then, you are clearly too biased and live in a delusional bubble and should be disregarded out of hand.

It is sad to see this blog state the problem is with the social security system. Social security has produced hundreds in billions in surplus, right? And a lot of that has been spent on a lot of stuff, including tax cuts, right? A simple minded person might conclude the problem is not with social security but with the general budget. It is unfortunate the social security system was set up that way, but that is another Greenspan failure.

[MichaelN]

Dear Mr. Riesenberg,

I'm sure that somewhere there is a "fiscally responsible Democrat" but I haven't met him.

You can't use President Clinton as an example because he only became "fiscally responsible" once the Republicans took control in Congress.

I was equally critical of Republicans, but my point was that during the spendthriftness of the R's in Congress (thru their being placed in the minority in 2006), I do not recall a single Democrat standing high and saying "STOP!" to what they were doing. No, all I heard is "you're not spending enough" on _______ (fill in the blank and you can chose just about anything - "education," "health care," "military benefits," "childrens' healthcare," and on and on.

Yes, the Democrats were clear that they wanted to raise taxes "on the rich" but, no, I don't recall any Democrat joining the minority of Republicans to speak out AND vote against the insane spending of Bush and now Obama.

However, I'd VERY much appreciate your educating me as to why "I live in a delusional bubble and should be disregarded out of hand." This comment suggests that you are solely interested in "heat," and not "light."

However, we ARE in agreement regarding social security. My earlier point regarding Al Gore and his "lockbox" related to that. He was a VP and a senator for how long and he did NOTHING regarding this issue? He becomes a candidate and "discovers" this matter and after the election the only sound that I heard from him and his party was.........silence. And now it is 10 years later.