Retirement: Surely You Jest
Tea Party Economist
by Gary North: The
cogent article in The New York Times discusses the utter
absence of any contact with reality in most Americans' retirement
plans. The numbers do not come close to adding up. The
article is here.
Here are the
basics. This will help you think through your situation.
Let me begin
with the obvious: I am 70 years old. You are reading an article
written by a man who is eight years beyond early retirement, as
determined by the Social Security Administration.
At age 62,
who has paid into Social Security can decide to begin receiving
checks from Social Security. The monthly check will be below
what it would be if he waits until normal retirement age, which
can be up to 67 years old. By retiring at 62, the retiree's monthly
benefit is reduced by anywhere from 25% to 30%.
to Gary North's Reality Check, a twice-weekly eletter, I
have two profit-seeking websites:
My work day
is probably longer than yours. I begin around 3 a.m., and I end
at 8 p.m. I take a 20-minute nap in the afternoon.
Not all of
this time is devoted to earning a living. Over half is. The other
time is devoted to my calling: writing a detailed book on Christian
economics. I will begin that project in one week. This week, I finish
the project that I began in March of 1973: writing my economic commentary
on the Bible. Volume 31 will complete it. It
is scheduled to be posted next Saturday morning on my GaryNorth.com
As I have
grown older, I have needed less sleep. I have used this extra time
to increase work on my lifetime project, which I decided to pursue
in 1960: developing an explicitly biblical Christian economics.
at age 17 that I would not retire until I could no longer mentally
do the work. So, retirement has not been a goal. I planned to avoid
How much money
do you need to retire? The New York Times article is a good
place to begin. It was written by a professor of economics who specializes
in the economics of retirement.
with a grim set of statistics.
percent of Americans nearing retirement age in 2010 had less than
$30,000 in their retirement accounts. The specter of downward mobility
in retirement is a looming reality for both middle- and higher-income
workers. Almost half of middle-class workers, 49 percent, will be
poor or near poor in retirement, living on a food budget of about
$5 a day.
means that a majority of Americans have not taken seriously the
economics of retirement. They have not saved. They have been
faithful Keynesians. They have spent. They have borrowed to finance
this spending. They have been grasshoppers, not ants.
Why have they
been so foolish? I offer these reasons. They are not based on a
are present-oriented. They discount the future: benefits and costs.
Americans are optimists. They believe that the costs of the future
will work out automatically.
Americans are youth-oriented. They ignore old age.
Americans believe that the federal government can solve all economic
problems if voters tell it to.
Americans believe that someone else owes them a comfortable retirement.
Americans do not like to look at numbers, especially economic
Americans prefer not to believe the recommendation of the Social
Security Administration: the program will cover 40% of pre-retirement
income. We need 70%.
do not believe the federal government will go bankrupt if it does
not cut Medicare costs.
of the article sets forth this sensible assessment of what it will
cost upper middle class people to retire.
maintain living standards into old age we need roughly 20 times
our annual income in financial wealth. If you earn $100,000 at retirement,
you need about $2 million beyond what you will receive from Social
Security. If you have an income-producing partner and a paid-off
house, you need less.
You need 20 times your annual income to survive in comfort. This
assumes that you will leave no inheritance to your children. You
and your spouse will consume all of your capital.
number is startling in light of the stone-cold fact that most people
aged 50 to 64 have nothing or next to nothing in retirement accounts
and thus will rely solely on Social Security.
not sat down with their spouses and calculated exactly what they
will need to live on, beginning the day after they both retire.
Why not? Because they have a pretty good idea that what they will
find will smash their dreams.
we manage to accept that our investments will likely not be enough,
we usually enter another fantasy world that of working longer.
After all, people hear that 70 is the new 50, and a recent report
from Boston College says that if people work until age 70, they
will most likely have enough to retire on.
I don't know
what report she is referring to. Here is the one I saw on Boston
I don't believe
that conclusion. There is no way that an extra four years in the labor
force will let anyone accumulate that much extra capital, let alone
keep it during the financial cataclysm to come. I do, however, believe
this aspect of the report:
If individuals worked full time until at least 66, they could
enjoy a long and financially secure retirement, with incomes one-third
higher than if they retired at 62.
Most people retire as soon as benefits are available at age 62.
are politically naive. They trust the federal government to keep
I was warned
in 1959 that the government would default on its Social Security
promises. My high school civics teacher ran the numbers for us.
The program would go bankrupt. It did: in 2010. The general fund
is now bailing it out.
I have planned
my whole adult life on this assumption. Because of a series of opportunities
that I could not possibly have forecasted, I am still in the work
force. I chose to be self-employed at age 34, and I have been able
to support myself this way. But on several occasions, my career
as self-employed was nip and tuck. I could easily have failed to
achieve my goal of independence from institutional employment. This
was important for me.
are dependent on a salary. This is the problem today: jobs are disappearing
in the crucial age bracket.
this ignores the reality that unemployment rates for those over
50 are increasing faster than for any other group and that displaced
older workers face a higher risk of long-term unemployment than
their younger counterparts. If those workers ever do get re-hired,
it's not without taking at least a 25 percent wage cut.
get laid off. Others also get sick. These are events that we cannot
plan for systematically. The only way to deal with them is to accumulate
It is easier
for an upper-middle-class worker to dream of employment beyond ago
70. He has good health. He also has a job that older people can
maintain beyond age 65. This is not true for most workers. "It makes
perfect sense for human beings to think each of us is special and
can work forever. To admit you can't, or might not be able to, is
hard, and denial and magical thinking are underrated human coping
devices in response to helplessness and fear."
suggests this exercise. I agree entirely.
figure out when you and your spouse will be laid off or be too sick
to work. Second, figure out when you will die. Third, understand
that you need to save 7 percent of every dollar you earn. (Didn't
start doing that when you were 25 and you are 55 now? Just save
30 percent of every dollar.) Fourth, earn at least 3 percent above
inflation on your investments, every year. (Easy. Just find the
best funds for the lowest price and have them optimally allocated.)
Fifth, do not withdraw any funds when you lose your job, have a
health problem, get divorced, buy a house or send a kid to college.
Sixth, time your retirement account withdrawals so the last cent
is spent the day you die.
to do this. Wives do not pressure husbands to do this. Yet most
wives could make this calculation on their own, since they handle
family finances. Any wife with a copy of Quicken who writes monthly
checks, or monitors the automatic payments, can do this. Why don't
I think it
is this: they prefer ignorance.
There is a
growing lack of confidence about retirement.
March, according to the Employee Benefit Research Institute, only
52 percent of Americans expressed confidence that they will be comfortable
in retirement. Twenty years ago, that number was close to 75 percent.
I think that
the 52% who were confident have not looked at the numbers. If they
had, over half of them would be frightened.
that people have in the future is based on ignorance, procrastination,
and naivete. The voters do not understand how close the U.S. government
is to bankruptcy. I define "bankruptcy" as follows: "the inability
of the Treasury to borrow money at rates low enough to keep from
producing Great Depression II, but without relying on the Federal
Reserve System to lend at these low rates."
of the article then calls for some sort of mandatory retirement
program. This is where she abandons reality.
hope that fear can make us all get real. The coming retirement income
security crisis is a shared problem; it is not caused by a set of
isolated individual behaviors. My plan calls for a way out that
would create guaranteed retirement accounts on top of Social Security.
These accounts would be required, professionally managed, come with
a guaranteed rate of return and pay out annuities. This is a sensible
way to get people to prepare for the future. You don't like mandates?
Get real. Just as a voluntary Social Security system would have
been a disaster, a voluntary retirement account plan is a disaster.
us to "get real." How would the federal government guarantee such
a system? It would do what it did with all of Social Security's
net income over expenditures, beginning in 1936: buy legally nonmarketable
IOUs from the Treasury and let Congress spend the money.
with Lyndon Johnson, the government has cooked the books. It has
counted the Social Security's trust fund full of nonmarketable IOUs
from the government as if these funds were investments. Then it
relegated these IOUs to off-budget expenses. It counted the surplus
from Social Security as income, and used this money to reduce the
game ended in 2010. In that year, as I had predicted in 2009, Social
Security's revenues no longer exceeded Social Security's expenditures.
The government has had to use the general fund to make up the difference.
The general fund is running a $1.2 trillion annual deficit. The
Treasury is borrowing the money to stay afloat.
concludes with cheerleading. It is cheerleading for Congress.
humans may be bad at some behaviors, we are good at others, including
coming together and finding common solutions that protect all of
us from risk. Surely we can find a way to help people save
adequately and with little risk for their old age.
wants us to get real. So do I.
thing to get real about is this: Congress got us into the hole,
beginning in 1935: Social Security. It escalated this in 1965: Medicare.
thing to get real about is that both Social Security and Medicare
are bankrupt. They are being funded by transfer payments from the
thing to get real about is that voters will resist further increases
in Social Security taxes and Medicare.
thing to get real about is that voters will resist cuts in either
thing to get real about is that Asian central banks at some point
will stop buying Treasury IOUs that pay under one tenth of one percent
per annum (90-days) or under 2% (10 years).
thing to get real about is that the first members of the baby boomers
(1946-60) are starting to collect Medicare. That costs the government
about $11,000 a year per participant until he or she dies.
thing to get real about is that the
personal savings rate is below 4%.
thing to get real about is the unwillingness of Congress to consider
the fiscal implications of the first seven.
It is clear
where the United States is headed: the Great Default. The promises
made by the government, beginning in 1935, will be broken. There
will be winners and losers.
who are still paying Social Security and Medicare taxes are the
losers. The retirees are the winners.
will change at some point. The Federal Reserve will inflate. The
government will stop paying physicians what their medical services
cost them. There will be rationing of health care.
be increases in the retirement age. Workers will figure out that
it is in their self-interest to demand cuts in benefits for retirees.
be means-testing. People with above-average incomes will have their
promised benefits cut off.
At some point,
finally, the government will default on its debt. This will be either
indirect (hyperinflation) or direct (open default/deflation). In
either case, old people will be the big losers. So will holders
of IOUs issued by the Treasury.
Default will confirm my high school civics teacher's warning.
It will also
confirm the Boy Scout's warning: Be prepared.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2012 Gary North
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