10.01.2008 0

Opportunity Knocking on Danger’s Door

  • On: 10/21/2008 20:01:09
  • In: Fiscal Responsibility
  • By Howie Rich

    The Chinese word for “crisis,” we are told, consists of two symbols: the top signifying danger; the bottom, opportunity. Ernst & Young’s just released report, “Retirement Vulnerability of New Retirees: The Likelihood of Outliving Their Assets” spells out the same scenario in clear, concise English. So, you don’t have to be a Sinologist to get the unmistakable message.

    For the nation’s 78 million Baby Boomers, now retiring at a rate of better than 350 per hour, the E&Y analysis reveals the almost unthinkable, yet imminent, danger of a large proportion of them having to live out their remaining years in stark deprivation.

    Here’s the bottom line on the E&Y report:

    “The analysis finds that almost three out of five middle-class new retirees can expect to outlive their financial assets if they attempt to maintain their current pre-retirement standard of living. To avoid outliving their financial assets, middle-class retirees will have to reduce their standard of living, on average, by 24 percent.”

    Believe it not, that’s the good news. As is so often the case with economic statistics, the average is an inadequate, even inaccurate, index of the overall reality. The reality is that in 39 of the 50 states, the number of retirees who can expect to outlive their financial assets is right at, or well above, the average 59% – with the dismal outlook for new retirees in several states topping 70%.

    But, hold on; it gets worse. As chilling as the figures are for “new retirees” – those “65 and above who have already entered retirement” – the projections for “near retirees” – those “58 and planning on retiring at 65” – make the current calamity look like a cakewalk.

    According to E&Y, the average probability of “near retirees” outliving their financial assets is a staggering 74%. That’s right: on average, three out of every four Baby Boomers who are now 58 years old and plan on retiring at 65, will either have to scrap those plans outright, or substantially reduce their standard of living. And when I say “substantially,” I mean – according to the report – by a whopping 37%.

    Now, if you’re like me, you’re pausing right now to ask yourself, “How does the average middle-income person, barely making ends meet now, reduce his or her cost of living by more than one-third?” Sell the house? That goes without saying. Stop driving? In all likelihood. Turn back the heat to somewhere around 60 degrees. Definitely. Eat dog food. Don’t laugh. It’s that dire.

    Here are some of the additional findings from the E&Y report (which used advanced computer modeling techniques to incorporate replacement rate risk, longevity, investment risk, and inflation risk):

    o “Married couples with Social Security as their only guaranteed income have a 90% chance of outliving their assets during retirement.”

    o “Social security is the main source of guaranteed retirement income for individuals age 65 and older (40% of retirement income), followed by pensions and annuities (19% of retirement incomes) … Guaranteed income is projected to cover a decreasing share of retirement income sources, leaving households with increased responsibility for their retirement and at increasing risk of retirement vulnerability.”

    o “Nearly half of all Americans lack employer-based retirement plans”

    o “Without adequate personal savings upon retirement [Note: the Bureau of Labor Statistics puts median Baby Boomer savings at under $50,000], it is unlikely that retirees will maintain their standard of living even if they earn expected investment returns, if inflation is not too high, and they live to the average age expectancy. The same retirees may not outlive their financial assets even if death comes prematurely. On the other hand, retirees with a relatively large amounts of personal savings might still outlive their financial assets due to low investment, high inflation, or living to 100.”

    Clearly, that’s a pretty stark picture. For most Baby Boomers, it’s a mosaic of hard times and painful decisions, none of which will lead even remotely to going “gently into that good night.” And the sad truth is: the situation is even graver than E&Y indicates.

    Take the inflation factor, for example. E&Y used its own stochastic inflation methodology to project an annual inflation rate of just over 4% for “new” and “near” retirees. While that is far more accurate than the government Consumer Price Index’s “core inflation rate” of just 1% to 2% annually, it still misses the mark by a wide margin.

    The problem with the government figure, of course, is two-fold: First, beginning with the Carter Administration, federal economists cleverly redefined the CPI, with the goal of removing from the index such “volatile” items as food and energy. Those items had (and have) a decided tendency to push the CPI higher than the government cares to admit, reflecting substantial increases in the actual cost of living. So – zip! – they were gone.

    Second, during the Clinton Administration, the Boskin Commission recommendations resulted in yet another highly questionable reconfiguration that once again drove down the CPI, this time in order to reduce payments for cost of living adjustments. Using a convoluted equation of substitution, weighting, and hedonics, the government artificially cut the inflation rate to a fraction of what it would otherwise have been.

    So, now, when the feds announce the “core inflation rate” as a mere 1% or 2%, the real inflation rate – the rate calculated without the Carter/Clinton economic acrobatics – is actually considerably higher. That being the case, it’s clear that the vast majority of E&Y’s “new” and “near” retirees – faced with nearly triple the E&Y stochastic calculation – may not be able to afford to survive, even at the barest subsistence level.

    As my late friend Milton Friedman once said, “Only government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless.

    All of this bad news, I might add, comes at a time when the American Bankruptcy Institute Journal tells us that the percentage of Baby Boomers who have entered bankruptcy has already reached a record 39%, up from 27% in 1994. And the steepest increase in Chapter 7 filings occurred among people older than 55.

    It’s no wonder that some 30 million Americans are actively making plans to move offshore. And the fact is, with far more than half of the nation’s 78 million Baby Boomers now facing the dire prospect of watching their “Golden Years” turn to dross, that figure may be vastly understated.

    But, yet, there is another alternative. If government will tighten its belt, balance the budget, begin paying down the national debt, the tax burden and cost of living will fall commensurably. And Baby Boomers may find that “home sweet home” is also once again affordable.

    Howie Rich is the Chairman of Americans for Limited Government.


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