Counterparties: America attempts to retire

By Peter Rudegeair
July 12, 2012

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

Back in the spring of 2008, Roger Lowenstein came out with While America Aged, warning that the fragility of America’s pension plans “loom[s] as the next financial crisis”. Thanks to Lehman Brothers, his timing was a bit off. As Phillip Longman explains in a great piece in the Washington Monthly, now might be the time to start worrying:

According to a recent study by the Employee Benefits Research Institute, fully 44 percent of Baby Boomers and Gen-Xers lack the savings and pension coverage needed to meet basic retirement-age expenses, even assuming no future cuts in Social Security or Medicare, employer-provided benefits, or home prices. Most Americans approaching retirement age don’t have a 401(k) or other retirement account. Among the minority who do, the median balance in 2009 was just $69,127.

Among the litany of factors Longman cites that are coming to a head this decade: the “demographic deficit” that’s leaving the US with fewer working young people supporting more retired folks; the increase in household debt of all varieties over the last five decades; and the decline in median family net worth over the past 20 years.

There’s also the mostly undelivered promise of 401(k)s. As Jia Lynn Yang wrote recently, in 2009, 51% of Americans were “at risk” of not being able to maintain their current standard of living into retirement. That’s up from 31% in 1983. It’s looking more and more like Teresa Ghilarducci was right to argue: The 401(k) “is a failed experiment of how well individuals can save for their retirement”. Maybe it’s time to try her idea of “guaranteed retirement accounts“? – Peter Rudegeair

On to today’s links:

LIEBOR
Congress wants another try at asking a banker tough questions, this time with Bob Diamond – Guardian

JPMorgan
All 40 of JPMorgan’s in-house regulators were replaced last year with less experienced peers – DealBook

Politicking
Romney said he left Bain Capital in 1999. Government documents said he stayed on for three more years – Boston Globe
Confidential documents support Romney’s version of events – Dan Primack

EU Mess
Spanish PM announces tax increases and budget cuts, and predicts zero economic growth amid protests – WSJ

Negotiations
One-stop shopping: Private equity pulls a Wal-Mart and dictates prices to suppliers – DealBook

Bold Rationality
Forcing young people to work for the government at minimum wage for 18 months may not be the best idea – Bloomberg View

Markets Have A Message
US Treasury sells 10-year debt at lowest yield ever – FT

The Fed
FOMC minutes: More stimulus or additional policy actions may be needed “if the economic recovery were to lose momentum” – The Fed
The US economy is “stuck in a new kind of normal, somewhere between crisis and prosperity” – NYT

Charts
Soviet Russia: bad at economic planning, good at economic infographics – Ripetungi

Economy
Weekly initial unemployment claims decline to 350,000 due to onetime factors – Calculated Risk

Pigs in Mud
Lawyers demand ex-Dewey lawyers give back pay or “face years of litigation” – WSJ

Must Watch
Joe Weisenthal interviews Paul Krugman and shows CNBC how it’s done – Business Insider (Part I, Part II, Part III)

Bad News
The connection between rising black unemployment and the shrinking public sector – Dave Weigel

More From Felix Salmon
Post Felix
The Piketty pessimist
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
Comments
35 comments so far

Three answers to retirement:
(1) Keep working until you die.

(2) Move in with your kids.

(3) Step down your standard of living. A lot!

Does anybody see a fourth possibility?

Posted by TFF | Report as abusive

I thought the Washington Monthly article was pretty good, although I was a little put off by the author’s obvious biases to blame relaxed regulation and predatory lending. I would have liked to see more about consumer psychology on why we (as a society? as a certain class?) felt it necessary to accumulate the level of debt that many did. The article was woefully lacking in this regard.

Posted by Curmudgeon | Report as abusive

I am a consumer of a certain (boomer) age. When I first started receiving a steady paycheck, one of the first things I did was to go to the local public library to read books on personal finance. To this day I feel fortunate that I read and took to heart Andrew Tobias ‘The Only Investment Guide You Will Ever Need’. It was.

Posted by Curmudgeon | Report as abusive

I agree with Curmudgeon….most Americans are severly lacking in personal finance skills, which is one of the reasons why they love to buy things they don’t really need and cannot afford and end up over their heads in debt.

Most Americans never learn the basics of personal finance (since it is never taught in our K-12 system), such as budgeting, calculating the net present value of a stream of interest payments, etc., and because of that end up making horrible financial decisions (for example, using a 18% credit card to pay off 4% student loans).

Posted by mfw13 | Report as abusive

TFF, we already have too many workers for the way the workload is distributed; delaying retirement will only make the problem more acute.

I’m not saying I disagree with that idea, but that your answer #1 needs a qualifier. You know the answer… less hours for more workers, and government provided health care to make 30 hour weeks acceptable to employers. So make that #4.

Posted by KenG_CA | Report as abusive

@mfw13 – I agree with you completely. Compounding the problem, lots of people don’t even know how to do relatively simple arithmetic.

Posted by realist50 | Report as abusive

Posted by handleym | Report as abusive

“Three answers to retirement:
(1) Keep working until you die.
(2) Move in with your kids.
(3) Step down your standard of living. A lot!
Does anybody see a fourth possibility?

The fourth possibility is Die Earlier.

I (quite seriously) expect this one to become the go to option for the more psychopathic 50% of our society. Expect a lot more hearing about “I am just going outside and may be some time” ala Lawrence Oates, and what a fine thing it is for people to realize when they’re a useless burden to society and that they should just end it all.

Of course no Very Serious People will put things quite this way; rather they’ll go the more subtle route of talking about having lived a good life, and knowing when to die, and leaving without burdening the kids, and such like.

Other modern societies, once their pathologies have metastasized, have had life expectation (at birth or at 60) shrink; there’s no reason the US can’t follow the same path.

Posted by handleym | Report as abusive

** dons Darth Vader disguise **

@KenG – you are well know for describing those who save as “hoarders”, who are a destructive force in society and should be shot, or have their assets confiscated or inflated away or something like that. So, isn’t the end product of your affection for maximum consumption at all cost the creation of a class of impoverished retirees? – “As ye sow, ….”

Posted by MrRFox | Report as abusive

@ everyone – it’s mid-day on Friday the 13th here in Asia. In just a matter of hours now we’ll get the number for how big a harpoon The Whale and Macris planted in JPM (with IMO JD’s backing and over Drew’s warnings). Shall we make some guesses ahead of the number, just for kicks?

I’ll kick it off with – $6.8Bil.

Posted by MrRFox | Report as abusive

@Ken, surely you don’t believe there is a set amount of work in society? What makes an economy dynamic is the ability of people to imagine and deliver new products and services that no one ever thought they needed, which brings more wealth into society and employs more people. You don’t do that by redistributing today’s amount of work over a broader number of people; that’s simply a prescription for stagnation and decline (yes, I’m looking at you, France).

Although I’m with you on health care; today’s model simply doesn’t work anymore, though I don’t know what a new model should look like.

Posted by Curmudgeon | Report as abusive

MrFox, no, I don’t think the hoarders need to be shot or their assets confiscated. My proposal is that their income gets taxed away if they don’t invest enough of it. Use it or lose it. It’s not about consumption, but ensuring there is a constant flow of money. After all, what is an economy when money is not flowing? (stagnation and decline).

The last words of that sentence bring me to TFF, and it’s not that I believe there is a set amount of work in society, just that technology has reduced the amount of work needed to fulfill our needs, basic and then some. If we want to maintain the 40 hour work week for everyone who wants one, we need to consume more. That may not be the best solution, as increased consumption leads to increased consumption of natural resources, which may not be sustainable or healthy.

And speaking of health, on another day, on a different Felis post, I will give you a model for health care to address that last part of your comment.

Posted by KenG_CA | Report as abusive

sorry, TFF and Curmudgeon, I addressed my last comment to the wrong person. And I spelled Felix wrong. It’s still early here in CA.

Posted by KenG_CA | Report as abusive

Got it, Ken. I would say that our consumption patterns have changed, not that we are consuming less, and that has had implications to workforce composition. Because I work at primarily from home, my car is 14 years old, and I simply can’t justify purchase of a new one, so auto manufacturers haven’t had my business for quite a while. But my new Android phone is smokin’.

In short, we need fewer 20,000 person car factories, and more 200 person electronics ones. The upshot is that fewer and fewer manufacturing plants are going to be the big hulking monsters of the 20th century, and that has implications to our work patterns that society hasn’t worked out yet. I think we can employ enough people for our needs and wants, but we haven’t quite figured out what that is yet.

Posted by Curmudgeon | Report as abusive

“Because I work at primarily from home, my car is 14 years old, and I simply can’t justify purchase of a new one”

That’s because you’re at least somewhat responsible. Not being able to justify a purchase doesn’t stop a lot of people from buying things.

I agree that the trend in general will be towards smaller factories, the massive complexes for monster hits like the ipad notwithstanding. The internet does allow for the successful introduction of new products on a smaller scale, as national distribution through stores is no longer necessary to introduce a new product. However, it’s going to take more than a fairly valued Chinese currency for the U.S. to regain manufacturing jobs; the supply chain and ecosystem (meaning people with the right skills) left the U.S. along with manufacturing. As someone who is trying to launch a new electronics company, those two areas are the biggest obstacles to success (as a side note, taxes and regulations have had absolutely zero impact on this venture). It’s not going to be fixed in a few years.

Posted by KenG_CA | Report as abusive

Ken, the interactions with Chinese and other suppliers and currencies around the world is an entirely different set of variables that makes the whole job availability story much more complex. Interesting, skills and supply chain. They will likely never be back to where they were in the US 50 years ago, and we need to move on and make what we have work.

I’m not at all surprised that taxes (or cost in general) and regulation aren’t the issue, although they may be in some industries. Politicians are so terribly transparent.

As for the 14 year old car, it starts every time (yes, not American). Do I really need satellite radio (or even a CD player), heated seats, etc in a car that I’m in no more than an hour a week? Any rational person would not buy a new one.

Posted by Curmudgeon | Report as abusive

Curmudgeon, I’m not looking for the skills and supply chain of 50 years ago, just 15 years ago. Or even 12. I am moving on, it just makes things excruciatingly slow.

Any rational person would not buy a new one? I’m laughing. You need to lower your expectations, also.

You don’t need a CD payer, anyway. They’re obsolete. Get a bluetooth FM transmitter for your android phone and you can play all of your music over your car radio.

Posted by KenG_CA | Report as abusive

Tff-

The solution is (4) Start living within your GD means and planning ahead.

I came from poverty and didn’t even really pull my act together until my mid or even late 20s. Yet by age 31 I am in a position where I will be debt free by age 40, and all my friends marvel at how financial strong/responsible my family is.

The magic secret? Don’t buy crap you cannot afford/don’t need! I know crazy!

My wife and I both went to college, and have decent non-profit jobs. Our combined income is just under 90k. We live in the heart of a major metro, have one 15 year old car, and most days bike/bus to work. We don’t have cable, we only have 1 TV (and that was a gift), we don’t have credit cards, we max our 401k contribution to take advantage of matching, we got a 10 year mortgage and a 200k house instead of a 30year and a 400k house. We keep an emergency cash pillow.

Meanwhile friends with exactly the same (or higher) incomes bounce from financial crisis to financial crisis, while the drive new cars, live in the most expensive homes the bank would let them buy, and have 500 gadgets in their house they hardly use. Americans live so sloppily they can easily belt-tighten their way our of retirement difficulties. They just choose not to.

Posted by QCIC | Report as abusive

Just kidding, of course. After all, I deserve a new car.

And it sounds like you agree with my point above that the Washington Monthly article was terribly biased in blaming our individual debt on relaxed regulation and predatory lending. There is something in the human psyche, whether innate or as a response to our society, that makes many of us want more material goods.

Posted by Curmudgeon | Report as abusive

The self righteousness on display in this comment thread is almost breathtaking to behold.

QCIC, no wonder you’re able to max out your 401(k) contribution. In case you’re like that infamous Chicago professor who had a 200k household income and insisted he wasn’t rich, let me let you in on a secret.

http://www.usatoday.com/money/economy/st ory/2012-02-09/income-rising/53033322/1

Median U.S. household income was $51,413 at the end of 2011, or put another way, you’re bringing in a whopping 75% more than half the households in America. Good for you, but that doesn’t mean that other American households are simply irresponsible.

Posted by Strych09 | Report as abusive

QCIC, good for you. The fact is that a capitalist society needs all types of consumers. Those that spend every cent they make purchase goods and services that allow other jobs to be created. If everyone were like you, we would be poorer in the aggregate.

Our problem (among others) over the last 20 years or so was that we allowed debt and leverage to make it appear that more wealth was being created than was actually the case. Debt and leverage work, until they don’t any more. We see that happen to individuals and companies all the time, and the economy goes on. This time the house of cards got so high, and too many people played that game, so when it all fell apart, so did the economy.

Posted by Curmudgeon | Report as abusive

Curmudgeon, I wouldn’t blame any one segment of society for any of the financial problems, there’s enough to be spread around. I don’t believe in supply side religion anyway (demand is usually the driver), so I would assign a lot of blame for personal debt problems to the individuals. The lenders just made it easy (I don’t blame drug dealers for all of the drug problems, either), and are co-dependents or co-conspirators, depending on your perspective.

There is definitely a psychological aspect of the human desire to buy things, but it is also fed/enabled by companies that want to sell things. I read (most of) a book called The End of Overeating, (by David Kessler), which talked about how foods (mostly from chain restaurants) are designed (using salt, sugar, and fat) to change the brain chemistry and psychology to get people to eat foods that are bad for them, even when they know better. I think product and service sellers do the same thing. You know you want this, you deserve it, buy it, is a constant message that is broadcast every day, both subtly and directly. Many commenters on this blog like you are able to resist that siren call to buy stuff, but a lot of people seem pretty susceptible. So combine that need to sell things with other companies’ need to finance things, offering long term financing for just about anything, and here we are.

It’s an imperfect system that has evolved, rather than been designed, and only an informed and educated population can alter that evolutionary path. So, with few exceptions (I am harsh on Goldman Sachs all the time because those people are smart enough to know better), I try not to assign blame, but rather think of fixes.

Posted by KenG_CA | Report as abusive

I don’t know what to think about the comment by ‘handleym’, above, except that Paul Ryan’s budget will probably hasten the day in which what he describes will commonly occur.

Once that doesn’t address the budget deficit (created by tax cuts for the rich and unfunded wars under the administration of George W. Bush), we can take the next logical step and start turning people who haven’t saved enough for retirement directly into Soylent Green upon age 76.

Posted by Strych09 | Report as abusive

I guess the logical examination would be to go back to that 1983 number of 31% and see if now, 30 years later that number played out correctly or if the risk was over/under stated.
I also think there is a much larger risk that even someone with a decent retirement fund can get absolutely crushed by medical bills in a very short amount of time.

Posted by thispaceforsale | Report as abusive

Strych09, I agree with most of that comment, except I don’t think it will end in a Soylent Green scenario, or even as handleym suggested. Old and poor people have guns, low cost personal drones are going to get cheaper, faster, and more accurate, and there is a lot of entitlement in this country. If you throw right wing austerity into that mix, the result is more likely to be like shooting sparks in a room with a gas leak.

The haves that want more from the have-nots are delusional if they think the have-nots will just lie down and die.

Posted by KenG_CA | Report as abusive

Much to consider in this thread…

@Strych09, having a $90k income certainly helps to achieve financial security, but (as QCIC points out) there are plenty of people who make that much or more and STILL can’t find a way to save effectively. I have much less sympathy for somebody earning $100k who has trouble making ends meet than I do for somebody earning $30k who is pinched for savings.

@QCIC, children or no children? Many of the most expensive lifestyle elements revolve around that choice.

@KenG, the services sector continues to grow. I’ll happily help it grow further if I can find somebody responsible to do yard work at $30/hour.

And yes, the health care dilemma is at the basis of so many of our problems. It isn’t just that health care comprises 20% of GDP — it is the irrational way in which that burden is distributed.

Posted by TFF | Report as abusive

KenG, that was a really good summary of the message I was trying to lead to (within the context of the Washington Monthly article). But it goes beyond eating; we get messages via our phones as we walk down the street on sales or dining options available in the area. These messages are becoming so finely tuned to our preferences that ignoring them may be psychologically impossible. And we may not even want to ignore them. Hopefully we can once again find balance before we gorge ourselves on food, goods, and services once again.

Posted by Curmudgeon | Report as abusive

Curmudgeon, remind yourself that all advertising is lying. If you can’t see how a particular ad is lying to you, then that simply means that the advertiser is better at it than you are.

That isn’t wholly true (is anything?), but a decent operating principle. Though it has the (unfortunate?) consequence of making me very reluctant to purchase something I’ve recently seen advertised, even when I might have purchased it anyways.

Posted by TFF | Report as abusive

TFF, yes, the services sector can grow, but unless we can export some of those services, or import less goods, it’s not enough to pay for all those imports. And if the upper income brackets don’t spend more on services, your plan falls apart. The middle class doesn’t have enough disposable income to generate enough work for everyone who wants/needs it.

Posted by KenG_CA | Report as abusive

@KenG, I’m not sure what “plan” you are talking about?

Moreover, if one middle-income family buys a service from another middle-income family, the “disposable income” merely changes hands, it doesn’t disappear. Even taxation doesn’t change that — since the benefits are (mostly) redistributed to other middle-income families.

The problem with the system is that this “disposable income” is being siphoned off by the corporations and the wealthy, rather than being reinvested and recirculated in the economy. It is being siphoned off much faster than new money can be created, leaving the economy short.

Your premise that consumption is fixed is patently false. Consumption not only CAN increase, it WILL increase if money finds its way into the right hands.

I used to believe, as you do, that it is an import/export problem. But I’m thinking it is more than that — corporate profits are a record proportion of GDP, and the corporate “high earners” also represent a record fraction of the payroll. A dollar that ends up in Apple’s bankroll, or in the pocket of Zuckerberg, is just as lost as a dollar that ends up in China.

Posted by TFF | Report as abusive

TFF, I was referring your your suggestion that people hire other people to perform services for them.

Yes, the disposable income doesn’t disappear when one middle class family hires another, but my point is there is not enough of that disposable income among the middle class to support many people.

But I am totally in sync with your 3rd paragraph.

I didn’t say consumption is fixed, let me know where you got that impression.

There is unquestionably an import/export problem, we import far more than we export. There is also no question that over 100 billion of those dollars have landed in Apple’s bankroll, and are not being used by anyone. However, as much as I would like to criticize Zuckerberg, he’s not taking money out of the economy, his wealth is in shares of Facebook. It’s more like potential wealth, as in he can potentially sell those shares for cash, but until he does, he hasn’t extracted any wealth from the economy. I doubt that he has hoarded a lot of cash yet, he’s still pretty young.

Posted by KenG_CA | Report as abusive

Sorry, KenG, you did say that consumption needs to expand to increase employment. We might agree more than we disagree on this? My main point being that the service industries offer greater opportunity for increased consumption than those that produce material goods. They also rely less on imported goods and resources than manufacturing.

The import/export balance will eventually swing back, as China tires of subsidizing our deficit spending. A free currency exchange market will make that happen sooner or later.

The corporate/labor imbalance is more problematic, and one we must address internally. Modern technology allows fewer people to run larger operations than in past decades. It is natural that this should tend to concentrate the wealth, but that still is unhealthy.
(I wonder, what would be the trade deficit if the 1% were considered a foreign country?)

Perhaps the answer is to continually increase the money supply to compensate? (A nod here to those who remind us that US Treasury obligations aren’t terribly different from “dollars” produced by the Fed.) Targeting NGDP growth or employment (rather than emphasizing inflation) would perhaps achieve this?

Alternatively, we might consider the impact of various taxation schemes. How might taxation discourage hoarding?

Posted by TFF | Report as abusive

TFF, we agree a lot more than we disagree.

I’ve been waiting 30 years for exports to catch up to imports. I don’t think China will stop subsidizing exports until their domestic demand and income can keep enough factories running. And they won’t let their currency float until that happens, so it’s not going to happen in the next four years.

We have been increasing the money supply to compensate, and as much as the 1% complains, it’s their own fault. If they kept more money in circulation, there wouldn’t be a need for the continuous printing of money. The more profits that are recirculated, the less the government needs to inject into the economy.

Did you ask that last question just so I could respond with my usual high tax rate/high investment tax credit pitc

Posted by KenG_CA | Report as abusive

Thought you might appreciate the softball, KenG.

But one way or another, the money needs to be allowed to circulate effectively. Not quite sure how the “velocity” of money is calculated, but the money supply has increased dramatically over the last few years while the GDP has barely budged.

Posted by TFF | Report as abusive

The people who are accumulating unused profits don’t want to spend or invest those profits, they don’t want to pay taxes,and they don’t want the government to inject money into the economy to replace what the hoarders are taking out of circulation. So how do they expect the economy to grow?

I normally would have swung at the softball, but I’m traveling and don’t like writing long rants on a tablet, so I’ll leave it at that. For now.

Posted by KenG_CA | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/