Retirement?

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Recently by Gary North: The Untouchables

     

A 90% cogent article in The New York Times discusses the utter absence of any contact with reality in most Americans’ retirement plans. The numbers do not come close to adding up. The article is here.

Here are the basics. This will help you think through your situation.

Let me begin with the obvious: I am 70 years old. You are reading an article written by a man who is eight years beyond early retirement, as determined by the Social Security Administration.

At age 62, an American who has paid into Social Security can decide to begin receiving checks from Social Security. The monthly check will be below what it would be if he waits until normal retirement age, which can be up to 67 years old. By retiring at 62, the retiree’s monthly benefit is reduced by anywhere from 25% to 30%.

In addition to Gary North’s Reality Check, a twice-weekly eletter, I have two profit-seeking websites:

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My work day is probably longer than yours. I begin around 3 a.m., and I end at 8 p.m. I take a 20-minute nap in the afternoon.

Not all of this time is devoted to earning a living. Over half is. The other time is devoted to my calling: writing a detailed book on Christian economics. I will begin that project in one week. This week, I finish the project that I began in March of 1973: writing my economic commentary on the Bible. Volume 31 will complete it. It is scheduled to be posted next Saturday morning on my GaryNorth.com site.

As I have grown older, I have needed less sleep. I have used this extra time to increase work on my lifetime project, which I decided to pursue in 1960: developing an explicitly biblical Christian economics.

I decided at age 17 that I would not retire until I could no longer mentally do the work. So, retirement has not been a goal. I planned to avoid it.

How much money do you need to retire? The New York Times article is a good place to begin. It was written by a professor of economics who specializes in the economics of retirement.

STATISTICAL REALITY

She begins with a grim set of statistics.

Seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts. The specter of downward mobility in retirement is a looming reality for both middle- and higher-income workers. Almost half of middle-class workers, 49 percent, will be poor or near poor in retirement, living on a food budget of about $5 a day.

This means that a majority of Americans have not taken seriously the economics of retirement. They have not saved. They have been faithful Keynesians. They have spent. They have borrowed to finance this spending. They have been grasshoppers, not ants.

Why have they been so foolish? I offer these reasons. They are not based on a scientific survey.

All people are present-oriented. They discount the future: benefits and costs. Americans are optimists. They believe that the costs of the future will work out automatically. Americans are youth-oriented. They ignore old age. Americans believe that the federal government can solve all economic problems if voters tell it to. Americans believe that someone else owes them a comfortable retirement. Americans do not like to look at numbers, especially economic numbers. Americans prefer not to believe the recommendation of the Social Security Administration: the program will cover 40% of pre-retirement income. We need 70%.

Americans do not believe the federal government will go bankrupt if it does not cut Medicare costs.

The author of the article sets forth this sensible assessment of what it will cost upper middle class people to retire.

To maintain living standards into old age we need roughly 20 times our annual income in financial wealth. If you earn $100,000 at retirement, you need about $2 million beyond what you will receive from Social Security. If you have an income-producing partner and a paid-off house, you need less.

Got that? You need 20 times your annual income to survive in comfort. This assumes that you will leave no inheritance to your children. You and your spouse will consume all of your capital.

This number is startling in light of the stone-cold fact that most people aged 50 to 64 have nothing or next to nothing in retirement accounts and thus will rely solely on Social Security.

People have not sat down with their spouses and calculated exactly what they will need to live on, beginning the day after they both retire. Why not? Because they have a pretty good idea that what they will find will smash their dreams.

If we manage to accept that our investments will likely not be enough, we usually enter another fantasy world – that of working longer. After all, people hear that 70 is the new 50, and a recent report from Boston College says that if people work until age 70, they will most likely have enough to retire on.

I don’t know what report she is referring to. Here is the one I saw on Boston College’s site.

Reality: If individuals worked full time until at least 66, they could enjoy a long and financially secure retirement, with incomes one-third higher than if they retired at 62. I don’t believe that conclusion. There is no way that an extra four years in the labor force will let anyone accumulate that much extra capital, let alone keep it during the financial cataclysm to come. I do, however, believe this aspect of the report:

Reality: Most people retire as soon as benefits are available at age 62.

Most people are politically naive. They trust the federal government to keep its promises.

I was warned in 1959 that the government would default on its Social Security promises. My high school civics teacher ran the numbers for us. The program would go bankrupt. It did: in 2010. The general fund is now bailing it out.

I have planned my whole adult life on this assumption. Because of a series of opportunities that I could not possibly have forecasted, I am still in the work force. I chose to be self-employed at age 34, and I have been able to support myself this way. But on several occasions, my career as self-employed was nip and tuck. I could easily have failed to achieve my goal of independence from institutional employment. This was important for me.

Most people are dependent on a salary. This is the problem today: jobs are disappearing in the crucial age bracket.

Unfortunately, this ignores the reality that unemployment rates for those over 50 are increasing faster than for any other group and that displaced older workers face a higher risk of long-term unemployment than their younger counterparts. If those workers ever do get re-hired, it’s not without taking at least a 25 percent wage cut.

People do get laid off. Others also get sick. These are events that we cannot plan for systematically. The only way to deal with them is to accumulate capital.

It is easier for an upper-middle-class worker to dream of employment beyond ago 70. He has good health. He also has a job that older people can maintain beyond age 65. This is not true for most workers. “It makes perfect sense for human beings to think each of us is special and can work forever. To admit you can’t, or might not be able to, is hard, and denial and magical thinking are underrated human coping devices in response to helplessness and fear.”

The author suggests this exercise. I agree entirely.

First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7 percent of every dollar you earn. (Didn’t start doing that when you were 25 and you are 55 now? Just save 30 percent of every dollar.) Fourth, earn at least 3 percent above inflation on your investments, every year. (Easy. Just find the best funds for the lowest price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college. Sixth, time your retirement account withdrawals so the last cent is spent the day you die.

People refuse to do this. Wives do not pressure husbands to do this. Yet most wives could make this calculation on their own, since they handle family finances. Any wife with a copy of Quicken who writes monthly checks, or monitors the automatic payments, can do this. Why don’t they?

I think it is this: they prefer ignorance.

There is a growing lack of confidence about retirement.

In March, according to the Employee Benefit Research Institute, only 52 percent of Americans expressed confidence that they will be comfortable in retirement. Twenty years ago, that number was close to 75 percent.

I think that the 52% who were confident have not looked at the numbers. If they had, over half of them would be frightened.

The confidence that people have in the future is based on ignorance, procrastination, and naivete. The voters do not understand how close the U.S. government is to bankruptcy. I define “bankruptcy” as follows: “the inability of the Treasury to borrow money at rates low enough to keep from producing Great Depression II, but without relying on the Federal Reserve System to lend at these low rates.”

SALVATION BY CONGRESS

The author of the article then calls for some sort of mandatory retirement program. This is where she abandons reality.

I hope that fear can make us all get real. The coming retirement income security crisis is a shared problem; it is not caused by a set of isolated individual behaviors. My plan calls for a way out that would create guaranteed retirement accounts on top of Social Security. These accounts would be required, professionally managed, come with a guaranteed rate of return and pay out annuities. This is a sensible way to get people to prepare for the future. You don’t like mandates? Get real. Just as a voluntary Social Security system would have been a disaster, a voluntary retirement account plan is a disaster.

She wants us to “get real.” How would the federal government guarantee such a system? It would do what it did with all of Social Security’s net income over expenditures, beginning in 1936: buy legally nonmarketable IOUs from the Treasury and let Congress spend the money.

Beginning with Lyndon Johnson, the government has cooked the books. It has counted the Social Security’s trust fund full of nonmarketable IOUs from the government as if these funds were investments. Then it relegated these IOUs to off-budget expenses. It counted the surplus from Social Security as income, and used this money to reduce the official deficit.

The deception game ended in 2010. In that year, as I had predicted in 2009, Social Security’s revenues no longer exceeded Social Security’s expenditures. The government has had to use the general fund to make up the difference. The general fund is running a $1.2 trillion annual deficit. The Treasury is borrowing the money to stay afloat.

The author concludes with cheerleading. It is cheerleading for Congress.

Although humans may be bad at some behaviors, we are good at others, including coming together and finding common solutions that protect all of us from risk. Surely we can find a way to help people save – adequately and with little risk – for their old age.

GETTING REAL

The author wants us to get real. So do I.

The first thing to get real about is this: Congress got us into the hole, beginning in 1935: Social Security. It escalated this in 1965: Medicare.

The second thing to get real about is that both Social Security and Medicare are bankrupt. They are being funded by transfer payments from the general fund.

The third thing to get real about is that voters will resist further increases in Social Security taxes and Medicare.

The fourth thing to get real about is that voters will resist cuts in either program.

The fifth thing to get real about is that Asian central banks at some point will stop buying Treasury IOUs that pay under one tenth of one percent per annum (90-days) or under 2% (10 years).

The sixth thing to get real about is that the first members of the baby boomers (1946-60) are starting to collect Medicare. That costs the government about $11,000 a year per participant until he or she dies.

The seventh thing to get real about is that the personal savings rate is below 4%.

The eighth thing to get real about is the unwillingness of Congress to consider the fiscal implications of the first seven.

CONCLUSION

It is clear where the United States is headed: the Great Default. The promises made by the government, beginning in 1935, will be broken. There will be winners and losers.

Today, workers who are still paying Social Security and Medicare taxes are the losers. The retirees are the winners.

This will change at some point. The Federal Reserve will inflate. The government will stop paying physicians what their medical services cost them. There will be rationing of health care.

There will be increases in the retirement age. Workers will figure out that it is in their self-interest to demand cuts in benefits for retirees.

There will be means-testing. People with above-average incomes will have their promised benefits cut off.

At some point, finally, the government will default on its debt. This will be either indirect (hyperinflation) or direct (open default/deflation). In either case, old people will be the big losers. So will holders of IOUs issued by the Treasury.

The Great Default will confirm my high school civics teacher’s warning.

It will also confirm the Boy Scout’s warning: Be prepared.

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

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