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Several years ago, I acquired a Web domain address, www.neversayretire.com. I had concluded that millions of baby boomers would discover at age 65, much to their chagrin, that their plans for a comfortable retirement had been smashed by the reality of low economic growth, low returns from the stock market, their own insufficient savings programs for decades, and inflation. I figured that I might create a Website based on the theme, “never say retire.” I have not developed that site, but at least I set up a department on my Website. So, if anyone types the words “never say retire,” he is directed to my department.
Sad to say, hardly anyone ever searches Google for that phrase.
The media are filled with articles on how few Americans have the necessary $1 million in their retirement portfolios that is required today to live comfortably. With interest rates below 2%, and with stock dividends no higher, there is no way that a mere millionaire can live for 15 to 20 years without selling off portions of his portfolio, year by year. Unless he invested in housing before 1998, letting his renters pay off his mortgages, he is facing the prospect of having to deplete his capital, year by year. This is a fearful prospect. Yet people don’t plan for it.
Beginning in March 2000, American stocks went into a decade-long decline, when adjusted for price inflation of over 20%. After 18 years of high returns, 1982-2000, this reversal caught the boomers by surprise. They continued to invest in stocks, as their advisors recommended, but the returns have been negative. The mantra of “buy a no-load mutual fund of the S&P 500” has proven to be bad advice.
When I say they invested in stocks, I really mean about 20% of them did. About 80% of stocks are owned by 20% of the population: the richest members. Most boomers are not in this top 20%, so they are trusting that Social Security and a little money in the bank will provide them with their retirement.
A lot of information on retirement is published by the Employee Benefits Research Institute (EBRI), which has been researching this for decades. It is a non-profit research organization. It publishes detailed reports, sometimes filled with illuminating charts, on a regular basis. I have followed the organization for a decade. Its continuing theme: Americans do not save enough money for retirement.
THE ODDS ARE AGAINST YOU
For the poor in America, the news is bad. But, of course, for the poor everywhere, the news is bad. I think of Ed McMahon, Johnny Carson’s sidekick, who died bankrupt. His famous line was “How bad is it?” The EBRI offers a grim assessment in its latest report, “The Impact of Deferring Retirement Age on Retirement Income Adequacy” (June 2011). Unfortunately, the report was written for statisticians by statisticians. It was not written to communicate with the public.
We read that “the lowest preretirement income quartile would need to defer retirement age to 84 before 90 percent of the households would have a 50 percent probability of success” (page 1). What does this mean? You walk into an auditorium with 1000 randomly selected people age 84, and of 900 of them, only 50% have a shot at a comfortable retirement.
I don’t know what to do with this statistic. Call me stupid. Here’s my problem. According to the latest figures published by the United States government’s Centers for Disease Control, the average life expectancy of American males in 2007 at age 65 was about 17 years. So, the average American man who reaches age 65 will die at age 82.
If I walk into an auditorium filled with 84-year-old men, and I tell them that 90% of them have a 50-50 chance at a comfortable retirement, that’s because, on average, they only have a few months to live. They are the lucky ones. Most of their peers have already died. But I digress.
Of the early boomers, ages 48-57, the news is grim. As of 2010, nearly one-half (47%) are “at risk of not having sufficient retirement income to pay for ‘basic’ retirement expenditures as well as uninsured health care costs” (page 7).
If you were to read the report, which you will not do, since it is written mostly in academic gibberish, you would come across an occasional sentence or two that you could understand. The authors, on what appears to be a random basis, provide tidbits worth quoting. This caught my eye.
One of the factors that makes a major difference in the percentage of households satisfying the retirement income adequacy thresholds at any retirement age is whether the worker is still participating in a defined contribution plan after age 65. This factor results in at least a 10 percentage point difference in the majority of the retirement age/income combinations investigated (page 1).
I ask: “How is this worker still participating in a defined contribution plan?” The report does not address this issue directly, but I gather that the worker has not yet retired. So, no question about it, if the worker doesn’t retire, this greatly extends the likelihood that he will have enough money in his old age. He just won’t have any retirement.
Then there is this question: “How many American workers participate in a defined benefit plan?” The report does not say. According to a report issued by the accounting firm Ernst & Young in 2008, in 2005 the percentage of workers who were involved in such retirement plans was around 20% (page 2). In other words, the report from EBRI is close to useless for less than 10% of Americans. Whatever good news there is applies to only 50% of the 20% of Americans who (1) are in a defined contribution program, and (2) then decide to stay in the workforce beyond age 65. In short, the longer they keep working, the more likely they will die before their money runs out. To support this finding in incoherent English, the EBRI hired two statisticians.
You will find this passage amusing. It appears in the executive summary, which is where complex things are supposed to be boiled down into coherent prose. It deals with medical expenses.
Another factor that has a tremendous impact on the value of deferring retirement age is whether stochastic post-retirement health care costs are excluded (or the stochastic nature is ignored). For the lowest preretirement income quartile, the value of deferral (in terms of percentage of additional households that will meet the threshold by deferring retirement age from 65 to 84) decreases from 16.0 percent to 3.8 percent by excluding these costs. The highest preretirement income quartile experiences a similar decrease, from 12.8 percent to 2.6 percent.
What does this mean? It means that the two authors have found safe employment in the non-profit sector, where they can produce incoherent reports in exchange for upper-middle-class income. They had better do whatever is required to keep their jobs, because not many people can find employment writing stuff like this in the for-profit sector.
On page 20, the authors lapse into something approaching English. They say that many people retire at age 62. They do not say how many. About half do. (http://bit.ly/Retirement2008) They say that if workers resist this temptation and don’t retire until age 65, it still will not save most of them. (Note: you cannot draw full Social Security benefits until you reach age 66, and this will rise to 67.) Even to have a 50% shot at income adequacy, workers need more than a 25% raise for years before they retire. Or, as the authors put it, “the median additional percentage of compensation that would be required for retirement income adequacy at more than a 50 percent probability would exceed 25 percent of compensation annually (until age 65) for many age/income combinations.” In other words, forget about it. You won’t get the 25% raise — not in this market. Neither will the two authors.
I can see their bargaining strategy. They go to their supervisor. “Look, if you’ll just give us a 25% raise, we’ll write our future reports in English.” The response would be something like this: “If I had known reports like this could be written in English, I would have hired somebody else. You’re fired!” These guys have no career leverage. They would be wise to adopt this strategy: keep their mouths shut, avoid asking for a raise, and keep working long after age 65.
This applies to most Americans.
For amusement purposes only, you can read the report (i.e., look at words on a page and charts that convey little information) here.
WHEN WILL REALITY SINK IN?
With half of Americans retiring early, thereby cutting their lifetime Social Security payments, we are building up an army of voters who are heavily dependent on government money to survive. They will find that their income does not allow them to live in anything like the comfort they had imagined. They did not save enough money. Of those few who did save more than 10% of their disposable income, year after year, the last decade has eroded their capital.
If they did not cut spending when they were employed, they did not develop the habits of thrift that are mandatory in retirement. These habits are not free resources. They cannot be adopted overnight by most people. So, it will take several years of retirement overspending to persuade them that they have to change. By then, they will have depleted much or all of their savings.
Reality will not sink in apart from negative sanctions. People do not change their behavior unless there are costs to be avoided or gains to be made. We are creatures of habit. With respect to planning carefully for the future, most people have bad habits.
Here is a non-profit organization that lets people make plans for retirement. It has the right name: Choose to Save. It may be the best place for most people to begin. But most people do not really want to face reality, because to do this would require them to change their behavior.
The cost of change is always high. Only in the last two or three years has the financial press been hitting at the theme of the need to delay retirement. This idea is percolating in the background. Most people think that things will somehow work out by themselves, that deliverance will come out of nowhere. They do not look at the numbers. They don’t want to see the numbers. The numbers do not add up.
Reality has not yet begun to sink in. By the time it does, most people will be too late in their careers to adjust.
Yet the dream of retirement is so powerful that most American refuse to abandon it. They do not make plans to stay in the workforce. They pretend that the numbers will work out for them, even though the numbers will not work out for their peers. They retire without counting the cost.
RESISTING THE TIDE
The people I have worked with ever since I finished my university training have been anti-retirement. I think of Ludwig von Mises, who continued teaching at New York University until he was 88. His hearing got bad, but his mind didn’t. In 1965, at age 84, he wrote an article on gold. He ended it with this warning: “There is only one method available to prevent a farther reduction of the American gold reserve: radical abandonment of deficit spending as well as of any kind of ‘easy money’ policy.” Six years later, Nixon took the United States government off the gold standard. The gold outflow that Mises had predicted had taken place.
I recall speaking with Mises privately in 1971. He had retired two years earlier. He died two years later. He was still alert. He still had a good memory. I did not hear that he faded in the subsequent two years.
I think of Leonard E. Read, who founded the Foundation for Economic Education in 1946 and who died on the job in 1983 at age 84. He had slowed mentally and physically at the end, but he refused to quit.
I think of F. A. Hayek. In 1985, when he was 86, Mark Skousen and I interviewed him. He had just finished his final book, a great book, on the failure of central economic planning: The Fatal Conceit. Listen to the interview here:
These men made major contributions. Mises and Hayek became prominent in their 30s. Yet they kept at it into their late 80s. They had the dedication to their work that overcame whatever physical impediments they had.
Mises knew what was coming, and he said so in print. When asked what the best inflation hedge is, he replied, “Age.” He died two months after Nixon unilaterally abandoned the gold standard.
For Mises and Hayek, reality set in early. They saw by 1920 where socialism was heading and why it would fail. They saw where Keynesianism was heading as soon as The General Theory was published. Hayek lived to see the Soviet Union fall. They never stopped battling the welfare state, despite the fact that in their lifetime, they were both considered eccentric dinosaurs for opposing the wave of the future.
MAKING THE TRANSITION
I recommend that you think about what you want to retire into. There will be a transition. You will stop doing the kinds of things you do now in the environment in which you do them.
The free market rewards service. It is a social order based on service to customers or donors. To participate in the market order is to gain the habits of service.
If you can identify future buyers of your services, you can begin to make preparations to meet future demand. What is the kind of demand that you would like to meet?
It takes capital to fund any transition. It may take mostly time, but this surely is capital. If you are not allocating it today in terms of what you want tomorrow then you suffer from what Mises called high time preference. Those who have high time preference much prefer present consumption to future consumption. They buy what they want. They pay for present consumption with reduced future consumption.
The transition should begin with time preference. Count the cost of the future. Then allocate time and money to meet your expectations. You may make a mistake, but responsible action requires action.
I think of Mises in 1934, who was convinced that the Nazis would gain power in Austria. He left the country, leaving his library behind. In 1940, he left Switzerland for he United States. He would surely have been executed by the Nazis had he remained in Austria. He planned for the future. Retirement was not part of his plans. Survival was. Fighting the good fight was. In 1940, he had another 25 years of productivity ahead of him. My generation of Austrian School scholars benefitted from his planning and action.
It pays to stay in the workforce if you can.
July 2, 2011
Copyright © 2011 Gary North