James M. Barrie used Netherland as a metaphor for those like Peter Pan who refuse to grow up – a place of eternal childhood. It reminds one of Washington’s denizens. It is especially fitting for a major problem that has been woefully ignored by the press and politicians – that is the coming poverty among senior citizens and the inadequacy of saving toward retirement. It is a problem that will get far worse before it gets better. Fault lies with all of us – government, business and consumers. But the principal villain is an attitude that celebrates consumption and self-approbation, while denigrating what had been an historic culture of thrift and industriousness. The cause of that cultural shift is important to an understanding as to how it might be reversed, if possible. Can a self-absorbed, consumer-based society, with an increasingly dependent people become one that values saving and work more than a trip to the mall and entitlements?
Falling interest rates over the past three decades conditioned people and businesses to a debt trap. We are thirty years into a bond market rally, of which borrowers, including consumers, have taken full advantage. According to the Securities Industry and Financial Markets Association (SIFMA), total outstanding U.S. bond market debt rose from $2.5 trillion in 1980 to $38.2 trillion at the end of 2012, a compounded annual growth rate (CAGR) of 8.8%. Credit creation is at the heart of capitalism. Without it, economies fail. However, that 8.8% annualized credit growth only produced a CAGR in GDP of 5.4% over the same thirty-two years. Growth in credit even exceeded growth in the S&P 500.
Hyman Minsky, author of Stabilizing an Unstable Economy, noted that capitalism is inherently unstable because long-term capital assets are often financed with short-term financing. One could make a corollary argument that individuals have financed consumption with long-term financing – credit card debt that gets extended out, and a proliferation of second and third mortgages. Thirty years of ever-lowered rates have had the insidious effect of inoculating individuals against the far more onerous effects of borrowing in what may prove to be a rising interest rate environment.
During the recent recession, consumers reduced their debt in the aggregate. Over the past five years, mortgage debt on one-to-four family residences declined from $10.9 trillion to $9.8 trillion. However, it has now begun rising again. Credit card debt is 16.9% below where it was in 2008, according to an article in yesterday’s New York Times, but total consumer borrowing, excluding mortgage debt, rose to a record $3.04 trillion as of August, driven by student loan and auto debt.
The immensity of the problem of poverty for retirees should not be underestimated. Seventy-eight million boomers began turning 65 two years ago. They are doing so at the rate of 10,000 a day, a process which will continue for eighteen years. They will join the 40 million Americans who are already over sixty-five. America is aging. During the decade 2000 to 2010, the population of the U.S. grew 10% from 281 million to 309 million. During that same decade, the over 65 segment grew at 15%, while baby-boomers increased 31 percent. It is expected that during the current decade those over 65 will increase 38% to 55 million, according to data from the U.S. Department of Health and Human Services – all a consequence of “boomers” aging and people living longer.
Very recent trends in elderly poverty are disturbing. Improvements in elderly poverty rates in the first few decades of the post-War period have stopped and begun to reverse. In 1960, the official poverty rate of those 65 and older was 35%. By 1995, it had fallen to 10%. Over the next decade and a half, the numbers drifted lower, hitting 9% in 2010. Credit for the positive change was ascribed to increased Social Security expenditures per capita and the post-War boom in defined benefit plans. However, as a New York Times editorial over the weekend noted, the numbers of seniors in poverty are creeping back up – 9.3% in 2011 and 9.5% in 2012. Barbara Novick, vice chairman of BlackRock, was quoted in the weekend’s Wall Street Journal: “We really see retirement as the next big financial crisis.” In my opinion, the numbers of elderly poor are likely to rise substantially in the years ahead.
Both of the earlier positive trends have reversed. Increases in Social Security expenditures per capita, according to a report prepared by the Department of Economics and Center for Policy Research at Syracuse University and the Department of Economics at MIT, began leveling out in the mid 1980s. A few years earlier, large public companies began switching workers from defined-benefit plans to defined-contribution ones. In 1989, according to the Urban Institute, 42% of private sector workers were enrolled in defined-benefit plans. Today, that number is about 20%, and about a quarter of those are in plans that have frozen out new employees, or no longer accrue benefits for participants. By 2012, 51% of all workers were with companies that offered defined contribution plans, such as 401(k)s. That would compare to 40% in 1989. Those numbers suggest that about 20% of all private sector workers have no plan, or more than 23 million people.
Defined benefit plans for public sector workers risk bankrupting municipalities. Thus, there days seem likely to end. Most states have substantial unfunded pension and healthcare liabilities. There are only two possible exit strategies – raising taxes or reducing payments. The first impedes economic growth. The latter harms the individuals affected. Detroit has already gone bankrupt. On Monday, Chicago’s Mayor Rahm Emanuel was quoted on Bloomberg: “The pension crisis is no longer around the corner. It has arrived at our schools.” In the eleven years since Michael Bloomberg became Mayor of New York, the city’s annual pension costs have risen 400 percent. Houston, we have a problem!
Even for too many of those that do have 401(k)s there is not enough money. Fifty-one percent of the full-time workforce in the private sector has 401(k)s, with total assets of $10.1 trillion, or $172,000 per worker. Given recent actuarial tables, those funds will have to last the average woman 21 years and the average man 18 years. Additionally, the dollar per person number overstates the actual, as some portion of the $10.1 trillion in retirement funds are owned by those already retired.
In the absence of a reversal in consumer behavior, which in my opinion is unlikely barring extreme duress or a crisis, this is a problem that Congress and the Administration need to address. Savings should be encouraged, especially among the young and middle-aged, (for the elderly it is probably too late.) And consumption should be constrained. The tax code could be used for both. A means test should be deployed for Social Security recipients. The amount of money one can set aside for IRA-type accounts should be raised. Taxes on investment income and capital gains, particularly for those in lower tax brackets, should be reduced. While I have never liked the concept of a value-added or consumption tax, as they are regressive, they should be considered for items other than food, clothing, shelter and healthcare.
Polarization in Washington has made the problem more inextricable. George Friedman of Stratfor blames this antithetical state on the collapse of the political “bosses” and the rise of ideologues. I believe there is a lot to his analysis. Strongly held, incompatible beliefs do not allow the kind of reasoned debate that is necessary for resolution. But I also suspect we are living in an Alfred E. Neuman, “What? Me worry?” world. Ignoring problems will not make them go away. Addressing the issue of poverty among the elderly, while unpleasant, is necessary. Individuals will have to assume more responsibility, which is not a bad thing over the longer term, but will do little to assuage immediate needs. In his most recent “Investment Outlook,” Bill Gross quotes that eminent economist who appears to have become the patron saint of today’s consumer, Jiminy Cricket. “Just wish it,” he says, “and it will come true.” It won’t.
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