August 2011 – the world securities markets went crazy. The talking heads on television all had the answers, even if none of the answers were the same. A lot of pundits attributed the loses to Standard & Poor’s downgrading of United States debt – but that didn’t make sense because investors were rushing to buy the securities that S&P had just downgraded. Increases were attributed to short sellers rushing to cover their positions, and that’s possible, maybe. The risks of Greek default and the break-up of the Euro may have had something to do with the mess.
What’s important, even if it hasn’t been documented, is that tens of thousands of lives were ruined. The instability in the stock market couldn’t have come at a worse time. The Baby Boomers, the huge mass of humanity born just after the end of World War II, is marching inexorably towards old age, and what should be retirement – and for the overwhelming majority of these people, the current state of the economy is a disaster upending a lifetime of honest work. The Baby Boomers, the millions of people born shortly after the end of World War II are approaching retirement age, which is a polite term for unemployment, and they’re not ready. Some have been unemployed for years, others are just getting to a point where they’ll have to stop working, but the fact is that most are getting to a point where they have to live on their savings, and a lot of people don’t have any savings. Harris Polls recently reported:
When asked specifically about their retirement savings, rather more people report having these invested "mostly" (18%) or "an equal mix" (22%) in stocks and mutual funds. However, 34% of all adults have no retirement savings, including 25% of Baby Boomers and 22% of people aged 65 or older; and,
Most people have not changed the portfolio mix in the last 6 months of either their personal savings and investments (70%) or their retirement savings and investments (74%). Relatively small numbers have moved their investments into or out of stocks, bonds, bank savings, money market funds and CDs.
A disproportionate number of people have too much invested in stocks. Many began saving for retirement too late in life, and stocks were the only investment that had any hope of significant returns in a relatively short time. Bank interest has been about 1% or less. With the 2007 drop in the stock market, from which it never fully recovered, and the August 2011 drop, many people will face retirement with little more than Social Security. Thomas Geoghegan, writing in the New York Times wrote: “At retirement the lucky few with a 401(k) typically have $98,000. As an annuity that’s about $600 a month — not exactly an upper-middle-class lifestyle.”
The Center on Budget and Policy Priorities reports: “Without Social Security benefits, almost half of Americans aged 65 and older would have incomes below the poverty line, all else being equal. With Social Security benefits, only one-tenth of the elderly do. The program lifts 13 million elderly Americans out of poverty.”
As one indication of how essential Social Security is, 70% of people applying for retirement benefits do so before reaching “full retirement age.” Retirees can get Social Security benefits at any time between age 62 and 70, although some number, currently 66, has been tagged as “full retirement age” and “full benefits” Taking benefits early leads to significant reductions, up to 25% of “full” benefits, while delaying to age 70 raises the monthly pay-out.
Retirement isn’t a luxury option. Not that long ago, advisors told people who were inadequately prepared for retirement to work a few years longer. They should be so lucky. With six people looking for work for every job available, and firms less than willing to hire either the elderly or the long term unemployed, the word “retirement” is no more than putting a good face on a state of extended unemployment.
When Social Security was created, it was designed as part of a “three legged stool” to be combined with a pension from an employer and personal savings. That meant the savings might be risky, but the pension and the government program were secure. That changed as employers switched from pensions to defined benefit plans, 401(k)s and 403(b)s. The original plan had 2/3rds of ther total in a stable, predictable form since the employer assumed the risk of downturns and promised to pay a fixed amount. With a 401(k), the employee takes the risks of bad investments, so that 2/3rds of the retirement funds are uncertain. Introducing additional insecurity risks the economic future of the entire country. So does reducing benefits by any means, including delaying the age of full benefits.
Social Security is an easy target for anybody who wants to cut expenses, but they may wind up cutting into the entire future economy. Itn would be a better idea to reduce the unemployment rate to 5% and then do the calculations. Things might look better in the morning.