It's fascinating listening to the latest litany of arguments coming mostly from the political right about the simultaneous need to reduce Social Security outlays and convert every last American worker from a defined-benefit pension plan to a "less expensive" defined-contribution pension plan. I say mostly from the political right but the sad reality is that plenty from the center and even the left end of the political spectrum are peddling this same rubbish while everybody manages to ignore the elephant in the room....that we're a society about to be hit with a tsunami of gray hair in which most people's pensions have been stolen, their home values underwater, their Social Security checks threatened, and with zero return on virtually every traditional means of investment. How is our population gonna be able to afford to exist in its senior years? And why is NOBODY talking about this?
I'm in much better shape than most financially. I'm 33 years old with a decent job, single and living in an apartment with only basic expenses, and having no dependents that would otherwise account for tens of thousands of dollars in short-term and long-term depletion in my savings. I'm able to save about a third of my income, invest generously in IRA's every year, and am even one of the last lucky few with a pension plan...at least until it gets taken away. I've resisted investing in the stock market and am likely to continue to given the extent to which the masters of the universe have gamed the system....along with my continued suspicion that the fundamentals of our postglobalization economy offers little to sustain a long-term bull market. Even so, one would suspect my arrangement would lend itself to a healthy retirement 30-some years down the road....far better than the arrangements that most people have in the year 2011, at least. But once again, looking at my year-end bank statements, it's hard to see how the math works out.
I have approximately $31,000 invested in money markets...and you know what I netted in annual interest for 2010? $163. In an entire year, I earned $163 in interest on $31,000. Now my IRA dividend was slightly more impressive, but the figure is still far below historical averages and nowhere near the level of return on investment needed to retire. Now I'm no financial expert and I'm sure there will be people advising me on alternative means to invest my money that will be more productive, but the point is I'm Joe Investor....the average guy with a conventional understanding of investment strategies. And in no way is this trajectory gonna be sufficient for me or anybody else with my level of knowledge or less.
With this in mind, I'm gonna defy conventional wisdom with a statement and corresponding question. For the last quarter century, the consensus view across party lines has been that low-as-possible interest rates are the best course for economic growth. The Fed has recently enacted policies to ensure interest rates remain in the basement for as long as possible in the name of keeping the economy humming. But are we really better off after a generation of 0% interest rates? I understand the hypothetical argument in defense of low interest rates reducing the cost of doing business along with the ultimate cost of a home and other purchases, but looking at the trajectory of our economy over the time period in which interest rates have remained mired well below the historical average, I'm not particularly impressed with its impact on growth. The growth we have seen has largely stemmed from "irrational exuberance" during the tech bubble of the late 90s and the housing bubble of the mid-2000s, neither of which turned out to be real, sustainable growth. Far as I can tell, low interest rates have yielded us two consecutive lost decades.
Now compare this meager upside to the impact on individual investments. We've all heard the urban legends of how it used to be possible for an 18-year-old to put $5,000 in a savings account and be able to retire a millionaire. In today's investment climate, an 18-year-old could put $5,000 in a savings account and have $5,100 when he or she reaches retirement age. So here we are in 2011, with the largest cohort of Americans in history approaching retirement age with dramatically devalued homes, a decadelong bear stock market, no defined-benefit pensions awaiting them, the likelihood of smaller Social Security checks, and virtually no chance of generating a return on their investments in the era of permanent 0% interest. How does this all come together?
It's hard to imagine any other outcome than an overwhelming majority of tomorrow's senior citizens living below the poverty line...and that's even if Social Security's supporters are able to resist the recommended cuts. Is this really the great reward of the low interest rates we've been assured are in the nation's best interest ever since I was a little boy? And is the Fed really on the right track to keep this low-interest cycle on autopilot for the foreseeable future? I'm sure plenty of people a lot smarter than me would say they are, but one thing is clear....as long as our current arrangement of 0% interest rates, a stock market worth less than it was in 1999, stagnant wages, and declining home values holds, we're facing an epidemic of people reaching their golden years with a fraction of the money needed to retire and no mathematically plausible way to prepare for it.
Meanwhile, our elected officials carry on with their otherworldly pipe dreams to "save money" by cutting Social Security and dissolving defined-benefit pensions, ensuring an even more dire financial situation for the same people who's financial future already virtually guarantees poverty. Is a nation full of bankrupted elderly people really gonna be cheaper in the long run? Hard to see unless we're willing to let our grandparents live in the streets.
Am I way off about this? Or is the double-barreled assault of low interest rates and volatile, bubble-prone defined-contribution retirement plan, coupled with cuts to Social Security, guaranteeing everybody under 50 a dystopian future straight out of a Dickens novel?