Why Retirement Planners Should Be Depressed
Good workers in a corporate society are commonly expected to bracket their personal biases and emotions when they enter the workplace.
While this may be changing as more corporations adopt a “work-life balance” position, the majority of people in retirement planning industry, including writers who regularly cover this topic, have a right to be depressed if they take their work and the topic of retirement seriously.
The reason is that there is a major retirement crisis in the U.S. that spans people in all political parties, races and income brackets. Worse, this crisis has not become a major topic of discussion in the financial services industry and among elected officials.
There are many reasons for this, but the largest one is that retirement, as dull and mischaracterized as it is, is a social and political symbol for the American Dream. When this dream is flawed and failing, as it is now, it has implications for deeper meanings in American society, such as the real meaning, purpose and financial rewards earned for a lifetime of work, as well as what happens when older, experienced people leave the workforce in a society which values youth and productivity.
Retirement is complex since it has a significant monetary and social meaning.
On the monetary side, there are scores of academic, think tank, and industry studies that show Americans are financially ill-equipped to maintain the same quality of life after they stop working as when they were active in the workforce. Everything from having a low average net worth of $80,000, that is only worsened by the estimate that 69% of U.S. adults have less than $1,000 in savings, while 34% have no cash savings at all.
This should not be a surprise.
According to the Federal Reserve of Minneapolis, “over the past 10 years, a large fraction of U.S. households experienced a large and persistent decline in net worth.” This sad formula buttresses the argument that retirement will mean a lower standard for millions of people now in the workforce.
For younger people, the story could be even worse. Burdened with an average of $37,172 for 2017 college grads in debt means young people will have less chance of owning a home and benefitting from the potential cache of home equity. High debts means younger workers either have to reduce their standard of living while they are still working in order to save more or work more hours or in more jobs to build savings. Older generations did not have these debts and instead used the money as a down payment for homes. Now, these debts fuel the apartment rental boom.
Despite all the financial scenarios churned out by the retirement industry, there are only a handful of variable to manipulate to determine whether a person has enough for a retirement that will maintain their standard of living or not. These wealth engines are retirement account savings (including pensions and 401ks), Social Security, home equity and any possibility of receiving an inheritance. For millions of Americans, those are the wealth inputs.
But building wealth over a lifetime of work is not a linear activity. Since 1902 there have been 22 recessions. The 10 postwar recessions (1946 to 2006) ranged in length from six months to 16 months, averaging about 10 1/2 months. The 2007-09 recession was the longest recession in the postwar period, at 18 months, according to the National Bureau of Economic Research and the Minneapolis Federal Reserve. Recessions destroy wealth.
The severe 2008 recession, as the most recent example, destroyed $16.4 trillion in net wealth and smashed home prices so low that as of June 2017, housing prices still have not recovered to their pre-2008 levels. “Fresh data from real-estate website Trulia show that just 34.2% of homes have returned to the peak levels registered before the onset of the recession in 2008. What’s more, Trulia estimates it could take until 2025 for a true national recovery in home prices,” according to Trulia’s chief economist Ralph McLaughlin.
In the 2008 recession, household real estate wealth dropped $6 trillion, or nearly 30% of its value, from the end of 2006 to the end of last year. And after posting modest gains in 2009 and the first half of 2010, the value of homes started to fall again in mid-2010, according to the Federal Reserve, demonstrating that wealth recoveries are not linear or guaranteed.
This is important since home equity is an essential wealth engine and is the greatest single component of American wealth, far outstripping the value of retirement portfolios. This time-to- recovery in housing prices means the net worth of millions of Americans will be in the red until house prices rebound. If you happen to retire when house prices are low, your net worth is dragged down, so lucky timing plays a huge role in retirement planning and this is a risk that cannot be hedged.
How Bad is the Retirement Crisis Today?
In the Great Depression (that lasted from around 1929 to 1941), the significant stock market losses only affected about 3% of the U.S. population. However, at the time of the start of the 2008 recession, there were about 50 million 401(k) accounts that held an estimated $4.5 trillion in assets in defined contribution (DC) plans. This represented about one-quarter of the total $17.4 trillion in U.S. retirement assets, according to the 2011 Investment Company Fact Book. Of this amount, DC plans held $4.5 trillion and IRAs held $4.7 trillion.
The 2008 recession caused an estimated $1 trillion in investment losses with $1 trillion in lost home equity. These losses disproportionately fell on middle- and low-income families at the same time that real wage growth fell even as productivity rose 80% from 1979 to 2009.
This dreadful combination has produced an uncertain situation where Americans are in a cycle of save-and-splurge-building up their retirement nest eggs to fund their spending sprees before retreating to start the cycle all over again,” according to the Washington Post.
There are other reasons for people in the retirement industry to be depressed about the prospects of retirement and the future of the American Dream, such as job security, income disparities, and voter suppression, but the largest financial and political concern should be health care costs.
Like most other issues related to retirement, health care costs are a risk that Republicans and the insurance industry want to place on individuals. This risk can be mitigated to some degree by insurance, but the insurance industry does not pivot on the supply-and-demand factors and free-market forces that Republicans describe. This is because the insurance industry assigns a dollar value to its risks devoid of any consumer input. If you have a pre-existing condition, it is a higher risk, so you will pay more for the coverage. This is inherent in the insurance business model.
Worse, 95% of a person’s lifetime medical costs are incurred in the last 5% of an individual’s life and 50% in the last 1% of a person’s time on earth.* This leads to wrenching questions at the family level about whether it pays to keep a loved one alive and it will be worse if Medicare and Medicaid payments get reduced as the current Republican administration plans to do. These medical expenses can be hedged via the “free market forces” that Republicans propose, but their premiums are non-negotiable and will be dictated by the insurance companies that are proposing the cuts in federal medial subsidies.
So, how bad is the retirement crisis?
It was bad before the Trump administration and it will be much worse and the end of the Trump administration.
If the topic of retirement received national attention, it would open a huge debate about the end goal of working, the current quality of American life and ultimately the quality and accessibility of the American Dream.
It would question the nature and purpose of work if there is an unattainable goal looming 40 or 50 years into the future.
It would question income disparities in the wake of greater worker productivity, open the debate on national spending priorities, and whether there is an entrenched wealthy class that has disproportionate political power.
It all this happened, it would mean that retirement is really not such a boring topic after all.
*Investment Policy, Charles Ellis, Irwin Publishing, 1993, page 82.