Your Portfolio of Lies
by Gary North
Recently by Gary North: Roubini, Marx, and Keynes
Years ago, I bought a domain name:
http://www.NeverSayRetire.com.
I did this because I have long been aware of a crisis that will face tens of millions of Americans. They will not be able to afford to retire.
Every Western government has lied to its citizens, All have promised to provide an old age safety net. These promises will soon be broken.
Americans have long accepted these promises at face value. They have not applied a discount for the high risk of a government default on its IOUs. They have also not applied a discount for price inflation to compensate them for a politically inevitable policy.
Yet they are becoming vaguely aware that the government will in some way wiggle out of its obligations. Anyway, they say they think this. But they take no practical steps to hedge their portfolio of lies.
This is why I conclude that there is enormous self-deception in all adult age groups in the United States regarding the prospects of retirement. This self-deception is so comprehensive and so widespread that I have doubts about people's ability to make assessments and then make decisions that are consistent with their assessments.
The financial media are beginning to publish articles about how millions of Americans will not be able to afford to retire. Americans have not saved enough money, we are told. This is accurate.
These articles are coming about 45 years too late. It was clear to anyone with an understanding of basic economics back in 1965 that Medicare would bankrupt the United States government at some point. A few critics said so at the time, but they were not taken seriously. The program's expenses have grown relentlessly. They are going to undermine the solvency of the government. This means that there will be a default at some point. This default will also undermine Social Security.
The writers also report that more Americans than ever before are saying that they will not be able to retire. But the actual rate of retirement indicates that they do not really believe this.
ACTIONS SPEAK LOUDER THAN WORDS
The people being interviewed are telling the reporters one story, but their actions tell a different story. They say that they will not be able to afford to retire, yet the overwhelming majority of people who are eligible to start collecting full Social Security payments at age 66 do retire. This percentage has been increasing over the last decade, but not fast enough. A Congressional Research Service report dated September 2009 summarizes the development. Only a third of men eligible for full Social Security benefits around age 66 are still in the labor force.
In March 2009, 52% of men aged 62 to 64 were employed, compared with 42% in 1990 and 47% in 2000. Of men aged 65 to 69, 33% were employed in March 2009, compared with 26% in 1990 and 30% in 2000. Among women 62 to 64 years old, 41% were working in March 2009, compared with 28% in 1990 and 35% in 2000. Among women 65 to 69 years old, 25% were working in March 2009, compared with 17% in 1990 and 20% in 2000.
What the data reveal is that two-thirds of American men who reach the age of full Social Security payments quit working. Three-quarters of women make this decision.
If Americans were really concerned about their inability to pay for their retirement years, they would not retire. They would stay on the job. By law, they cannot be fired merely for being older. Companies are afraid to fire anyone who reaches retirement age who asks to stay on the job.
My conclusion: there is a deep-seated schizophrenia in America's older population.
This schizophrenia extends to the younger members of society. For over a decade, pollsters have asked voters if they believe that Social Security will be still be operational when they reach retirement. Over half of all people surveyed say they do not think it will be. Younger workers are even more emphatic that it will not be there.
Yet there are no signs that this age group is saving enough money to provide retirement. They say that the government will not be there with a safety-net program, but they refuse to build a safety net of their own.
Something is fundamentally wrong with the public's ability to assess economic cause and effect. If we believe their actions, they discount the bad statistical news and take at face value the government's lies.
BROKEN RETIREMENT DREAMS
The Wall Street Journal published an article on August 21 that dealt with retirement prospects.
The article began with the story of a woman who got trapped by events. Her mother became ill the 1990s. She needed long-term medical care. This is not cheap. So, the daughter stopped making contributions to her retirement account. Then the "ups and downs" of the stock market dealt her retirement account another blow, the author writes. She calls them ups and downs. This is misleading. The stock market is lower today than in March 2000, and consumer prices are 30% higher.
Today, the 67-year-old woman went back to work part-time as a data-entry clerk. She hopes to retire by age 70.
It's a sad story. But something is left out: numbers. Exactly how much money did the woman have to pay each month for her mother's care? For how long? How much had she been contributing to her retirement account before her mother got sick? In other words, is there evidence that she, in fact, would have been able to afford to retire, had her mother not gotten sick? We are not told. We only know that this is her explanation of what happened.
As for the stock market, the financial media did not warn people in the spring of 2000 that a decade-long decline was coming. They did not tell readers to sell stocks. Since then, they have repeatedly said that the best way to achieve a secure retirement is to save more money. They have also said that the best place for this money is the U.S. stock market. They have been wrong for over 11 years.
The woman says she will have a hard time retiring if she cannot sell her home. This indicates that she had regarded her home as her capital for retirement. She is not alone. She knows this. "Like most older people, my money is in my home. ... I'm caught between a rock and a hard place."
But why is she caught? Because she believed the U.S. government and the mainstream media. We now live in the aftermath of Alan Greenspan's anti-recession policies, beginning days after he took over as chairman in October 1987. The stock market fell 22% in one day. The Federal Reserve responded within 24 hours by flooding the markets with fiat money.
Greenspan always inflated his way out of short-term downturns. This created the housing bubble that he denied even existed. He got away with this because the mainstream media applauded.
The financial media did not warn readers in 2005 and 2006 that residential real estate was a bubble, and that home owners should not put any hope in their homes' equity as a retirement savings plan. I warned my readers.
So did a lot of other Austrian School analysts.
But we were ignored. Among the few financial media talking heads who did not ignore us, we were dismissed as naysayers, doomsters, and people without vision. Those who ignored us are now living in less expensive homes. Millions of them owe more on their mortgages that their homes are worth.
The bubble-blowers of course mention none of this. They insist that no one could have foreseen the popping of the housing bubble. Their victims are in despair, for good reason.
Another of the lady's complaints is on target. "Everything is more expensive. I cannot retire, I wish I could." But this price inflation began in the mid-1960s, when she was a young woman. It did not slow until about two years ago. How is it that she did not see this coming? For the same reason that the financial media did not see it coming. They did not understand Austrian School economics.
Ludwig von Mises warned about secular price inflation from 1912 until his death in 1973. His disciples followed his lead. He took a stand against the entire academic community and the entire financial journalism guild. He was right. They were wrong.
A generation ago, he was asked if he had an inflation hedge. "Yes," he said. "Age."
The lady in the article did not see this coming. Neither did the mainstream media, the world of academic economists, and politicians. It is a sad tale, but it was predictable. We Austrians predicted it . . . and were told that we did not understand economics.
The article continues: "Many older people are finding themselves in a position they never expected to be in at retirement age: still working or in need of a job." This is true. But whose fault is it? The voters. Their parents voted for politicians who voted for the welfare state. They imitated their parents. Now the bills are coming due, as they do in every ponzi scheme. Yet the victims seem surprised. This is a self-inflicted wound.
The article covers recent developments: the fall in stock market prices over the last 30 days, the decline of interest rates since 2008, and falling housing prices. All of this is true, and it is going to get much worse.
Then she cites a statistic. Three-fifths of workers surveyed by a nonprofit organization devoted to retirement studies said that they plan on working past age 65. Of these people, 47% said this is because they have no financial option. They will need health care benefits and income.
If people really took seriously this threat to their futures, they would be saving at 10% per annum, minimum. The older ones would be saving at 20%. They aren't saving at 6%. They show no sign of panic regarding old age. They may sing songs of woe to reporters. They may tell pollsters that they see what is coming. There is not much evidence that they are taking statistically relevant steps to avoid the grim future which they say they envision.
SAVE MORE AND WORK LONGER
Whenever we read these stories on the plight of the retirees, the author adds the obligatory warning about failing to act now and save more. This article is no exception.
But in this tight labor market, working into your golden years isn't easy. And you'll have to make your age and years on the job come across as assets, not liabilities. In addition, with the current market upheaval, you'll need a financial plan that puts your savings on the fast track and takes into account how Social Security and Medicare benefits could be affected.
But the author does go beyond this ritual response about saving more money. She admits the truth: the best plan is to plan not to retire.
For many older workers, the easiest option may be to continue with their current employer. But that will entail making themselves essential.
Workers should take on new projects when possible. And it's crucial to stay on top of the latest technology being used; you don't want to be perceived as the old guy who doesn't know what's going on.
This is very good advice. The fact is this: there is no way that most Americans will be able to save enough money to accumulate enough capital to sustain them in their old age, from age 66 to 80 for men and 84 for women. They will not have sufficient capital. This assumes that there will be no mass inflation. That is a low-probability assumption.
Older employees also can put their experience to use – and on display – by volunteering to mentor younger workers either formally or informally.
This is also very good advice. The older worker who can get younger workers up to speed rapidly is a real asset to any company.
If you are working on commission, you are in good shape if you can keep selling. The article interviewed a shoe salesman who is still on the job at age 70. He stated emphatically: "I have to produce or the company wouldn't let me work out here." He's wrong. The company would let him work, but he would eventually starve. The company would not risk a lawsuit over age discrimination. It would let the pressure of falling commission income push him into retirement.
THE ILLUSION OF A SAFETY NET
The governments of all Western nations have promised workers that they will be taken care of by the state in their old age. That promise cannot be fulfilled. Statistically, it is impossible to fulfill. This is why families should be making plans to resume the responsibility of caring for the aged members, as societies have done throughout history.
For as long as you are still in the labor force, you have a chance of being able to afford to care for aged parents. If you are trying to avoid becoming the aged parent who needs care, think through your present employment situation.
If you are in a job where you think the physical requirements will be too much for you, try to get transferred now. Don't wait for your boss to come to you to suggest this. You had better gain skills in the new position. This takes years.
Some firms offer phased-retirement programs: reduced hours worked. I recommend this strategy, with this proviso: you have a side business to retire into. You plan ahead. You devote more hours to it each week as you get older. You get it profitable, and then you phase out of your present salaried position.
Employers like this option. It allows them to get rid of dying wood without facing a lawsuit. They don't want oldsters on the payroll. They want younger people who have more years of service ahead of them. Another major incentive for hiring youngsters is this: they will be less likely to negotiate from expectations of high income. They have been battered by Bernanke's economy. They are happy just to get a job.
CONCLUSION
You are sitting on a portfolio of government lies. I don't know if you really understand that there is going to be a great default by the government. By "really understand," I mean this: you are taking steps not to retire.
If you are still planning to retire, you had better have a lot of money, and this money had better not be invested in markets that are going to collapse when the government's promises are finally exposed as lies.
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