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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 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 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?

Originally posted to Mark27 on Sun Jan 23, 2011 at 02:22 PM PST.

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Comment Preferences

  •  Higher interest rates (9+ / 0-)

    such as in the 70s and 80s are largely a function of higher inflation rates.  Your hypothetical 18 year old might well have wound up with $1,000,000 in the bank but its real value or purchasing power would be closer to that $5150.  

  •  As you note, nothing is guaranteed. n/t (2+ / 0-)
    Recommended by:
    Angie in WA State, gerald 1969
  •  You Should Invest in the Stock Market (4+ / 0-)

    Retirement saving contemplates your money growing at the rate the stock market has, historically, not money market rates.  You may distrust the stock market, with good reason, but to have a serious amount of money at retirement, you need to own something (stocks, real estate, etc.), not rely on interest.

  •  Good conversation (13+ / 0-)

    Both from the perspective of a 33 year old and from someone ready to retire.

    A lot can change in the 30 years before your retirement, but the Boomers will be left holding the bag. It will be different for them. They'll have to group together and live very modestly to survive.

  •  Of course (8+ / 0-)

    It is important to understand that the economy has been, from the time of Reagan's "deficits don't matter, run for the benefit of those in the upper classes.

    The steady decline of interest rates from the time of Volcker provided a steady stimulus to the economy, that many confused with real growth. It was not.

    Instead what we have seen is a country and a people that have managed to sort of maintain a standard of living by taking on more and more debt, which has been made possible by lower and lower interest rates.

    Unfortunately rates can not go lower, and, if they go up, they will work their magic - in reverse. The wall approaches, fasten your seat belts, not that it will help much.

    Social Security, while great in concept, was hijacked when it was added to the general budget. This allowed the wall to artificially recede for a few more years.

    The real game now is silent inflation fueled by high budget deficits and money printing. China is experiencing high inflation and soon you will see this transmitted to WalMart.

    Social Security will still survive and it will pay out its promised benefits ... but due to inflation these benefits will not buy what one had hoped for.

    The banking crisis and the accumulated debt are quietly being foisted on the masses through the back door. Not pretty at all - if you know where to look that is. or

    by taonow on Sun Jan 23, 2011 at 02:36:02 PM PST

    •  The "modernization" of Social Security in (4+ / 0-)
      Recommended by:
      taonow, buddabelly, Sunspots, Mr Robert

      1982, partially funded the tax cuts for the wealthier and wealthy.  The remainder of the funding was generated from from massive federal borrowings -- from $998 billion as of 9/30/81 to $13.56 trillion as of 9/30/10.  A period in which few dollars went to modernizing and expanding the US infrastructure.

      Bring Our JOBS and Troops Home NOW!

      by Marie on Sun Jan 23, 2011 at 02:53:57 PM PST

      [ Parent ]

      •  Can't help but compare (7+ / 0-)

        Canada has a similar system to Social Security. It also went through changes to adjust for the coming baby boomer retirements.

        Canada took the surplus and put it in a separate fund, managed by a group of professionals hired by the fund (CCPIB). Today that fund has substantial investments in tangible assets. Contrast that to the government IUOs from the US system.

        Canada hit the debt wall in the late 80's and had to cut spending and live within its means. It was a tough 5 years or so, but at the other end Canada ran budget surpluses (real surpluses) for 15 years in a row, until the current crisis.

        Sometimes it is better to take the pain early, and get your financial house in order, rather than just keep kicking it down the road. Debt can be a truly crushing burden on future economic growth. or

        by taonow on Sun Jan 23, 2011 at 03:23:41 PM PST

        [ Parent ]

        •  That tax deal was a serious mistake. (10+ / 0-)

          Obama should have just let the rates go up on everybody.

          Then everybody would have seen the sky wasn't going to fall and, actually, the country would be better off.

          •  Of course (2+ / 0-)
            Recommended by:
            TracieLynn, Bush Bites

            But "what is good" is always contrasted with "what is easy" in this economy.

            If Congress decided to allow all all the tax cuts to expire, consumption GDP may have fallen, perhaps drastically, as that money comes directly out of disposable income.

            Now, I think that would be a good thing, since I think the structural bias toward consumption activities in our economy is a huge problem. But it may have felt like a major economic blow in early 2011.

            "Pain now for gain later" is usually an election loser.

            (-5.50,-6.67): Left Libertarian
            Leadership doesn't mean taking a straw poll and then just throwing up your hands. -Jyrinx

            by Sparhawk on Sun Jan 23, 2011 at 04:41:44 PM PST

            [ Parent ]

        •  Clinton proposed something similar. (0+ / 0-)

          Got clobbered on it.

          Repubs, ironically enough, complained that it would allow the government to pick winners and losers in the stock market.

          •  Clarification. (0+ / 0-)

            Clinton proposed something similar to the Canadian plan of putting surplus SS money into investments.

          •  A Clinton privatization scheme that (1+ / 0-)
            Recommended by:
            Bush Bites

            the GOP Congress rejected?  Now that's partisanship too stupid to know on which side its bread is buttered.  (They did wise up for Telecom deregulation, repeal of Glass-Steagall, and deregulation of commodity futures.)

            Bring Our JOBS and Troops Home NOW!

            by Marie on Sun Jan 23, 2011 at 04:07:27 PM PST

            [ Parent ]

            •  Kind of interesting. (2+ / 0-)
              Recommended by:
              Marie, ColoTim

              Using the surplus
              The president proposes strengthening Social Security's finances by transferring to the Trust Fund over the next 15 years an additional $2.7 trillion dollars, or nearly two-thirds of the expected budget surplus. The Social Security program will use these funds to purchase treasury bonds. Funds received by the treasury from the sale of these bonds to the Trust Fund will be used to pay off the federal debt held by the public. These additional funds received by Social Security will extend the Trust Fund's solvency by 17 years - from 2032 to 2049 (see endnote 1). The scheduled payment to Social Security would be made even in years in which there are no surpluses by cutting other spending, raising taxes, or borrowing.

              Investing in the stock market
              President Clinton's plan also proposes that some 20% of the $2.7 trillion in new money paid into the Trust Fund be invested in the stock market. Stock holdings would be kept below 14.6% of all Trust Fund assets and would average about 3.4% of the total value of the stock market over the next 50 years (Goss 1999). Because the plan assumes that returns from the stock market would average 6.75%, as opposed to 2.8% from the bonds in the Social Security Trust Fund, the administration predicts that these investments would extend the life of the Trust Fund for an additional six years, to 2055.


              •  That's privatization. Currently 100% (0+ / 0-)

                of the surplus is technically invested in Treasury bonds.  None of it was used to replace T-bills held by the public because we don't tax enough and spend too much on the Pentagon.

                Don't we know how that 1/3 "investment" in the stock market would have fared?

                Bring Our JOBS and Troops Home NOW!

                by Marie on Mon Jan 24, 2011 at 01:35:42 PM PST

                [ Parent ]

        •  Well, technically the US invested (2+ / 0-)
          Recommended by:
          taonow, Sunspots

          those surplus funds in the safest of all investments: US Treasury notes.  Only two problems with that: 1) Unka Alan and cohorts manipulated the interest rate on those notes 2) as the payback date approaches the federal government refuses to collect the money needed.

          Bring Our JOBS and Troops Home NOW!

          by Marie on Sun Jan 23, 2011 at 04:04:36 PM PST

          [ Parent ]

        •  Nobody Was Running the US. Canada Was Being Run (3+ / 0-)
          Recommended by:
          TracieLynn, Bush Bites, Sunspots

          as a country. US leadership has only been running markets for 30 years.

          We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

          by Gooserock on Sun Jan 23, 2011 at 04:41:49 PM PST

          [ Parent ]

  •  Yea you missing the riots that will (4+ / 0-)
    Recommended by:
    irmaly, Hillbilly Dem, Cliss, Sunspots

    Destroy this country when this happens.
    Look around the world why is it a thought that it won't happen here.

    •  I don't know about this (0+ / 0-)

      The American people have taken the great transfer of wealth to the top 1% and the great offshoring of most of our middle class economy for the past 30 years pretty passively.

      I see no evidence that there will be any sort of mass movement.

      •  Mais non, dem Frogs be meaner and tougher (0+ / 0-)

        den de teabaggin' 'Merikin workin' slob?
        Fuck wid da Frog worker an' dyu gots riots inda streets. Fuck wid da 'Merikin an' he change da channel fum ESPN1 TO ESPN2 an' reach fo' 'nuther beer.

        Republicans: "Double your pleasure, double your fun, double your National Debt, and blame 'The One' "

        by Bluefin on Tue Jan 25, 2011 at 06:00:03 PM PST

        [ Parent ]

  •  Why wonder? Make a spread sheet (4+ / 0-)
    Recommended by:
    TracieLynn, Eiron, buddabelly, sydneyluv

    Put your data in a spread sheet along with assumptions including inflation (I use 4%), ROI (I use 6%), lifespan (I use 99 yrs). Now my assumptions are very generous as you can see, I will never live to 99 with my DNA, inflation has been closer to 0 and my ROI has been very high and very low but over the last umpteen years today's average is 11% (the DOW has run around 7% nationally over the past 10 yrs). Put in all of the assumptions and your spread sheet will show you your precise retirement date. Given your diary, no children and a modest lifestyle you'll be shocked how early it is.

    There's no doubt about the fact that there's an urgent need for a national retirement instrument to replace 401ks. Maybe there will be a robust enough design to fold in SS. But fundamentally the industrial era employer supplied benefits - health, unemployment, and pension - are obsolete in the global marketplace. We can do better and cheaper with a single, portable, nonprofit social insurance architecture decoupled from employment and seeded with federal contributions but funded ongoing by  employees and employers though independent from any single employee-employer relationship. Imagine the boom for business if these archaic benefits were removed from its accounting and constant redesign and management.  

    "Life is not about waiting for the storms to pass... it's about learning how to dance in the rain." (unknown)

    by kck on Sun Jan 23, 2011 at 02:43:15 PM PST

  •  Nifty trick wrt reviosionist history (1+ / 0-)
    Recommended by:

    Reshuffling the post-war American dream to delete 1950-1980.

    Kids these days:


    What's that?

    I thought Americans always worked on the assembly line until they keeled over?"

  •  Not just interest rates (8+ / 0-)

    We're talking about a decade or more of people unemployed or underemployed. Those people's current contributions to SS will result in drastically reduced payout when/if they get to retire.

    I'm 57 so I'm looking at my annual statement now. In my 20s and 30s when I was either at home raising my children or in school I just tossed it aside. Now I see what those years of low or no income have done to my bottom line and it ain't pretty.

    That's another reason why "fixing" SS is the absolute worst thing to do at the absolute worst time.

  •  Each of the last 23 months we've set the all-time (6+ / 0-)

    record for Americans needing food stamps.

    More than 1 out of 8 of us cannot get enough to eat without food stamps.

    That's an even bigger problem than not being able to retire. Not that I disagree with your conclusion.

    But the causes are the same: the production of American society mostly goes into the pockets of billionaires and millionaires and there's not enough left for everyone else.

    43 million Americans on food stamps. Trickle down starts any minute, right?

    by tiggers thotful spot on Sun Jan 23, 2011 at 03:02:01 PM PST

    •  The Outcome Will Be Similar..... (5+ / 0-)

      If it becomes impossible to save for one's retirement due to zero return on investment, it means more senior citizens on the job well into their would-be golden years, thus assuring labor markets will continue to be tight for younger people.  And it also means the majority of seniors unable to continue working will be living in poverty.

      So I certainly agree that the growing ranks of the working poor and long-term unemployed are a bigger problem than the one my diary outlined, it seems as though better public policy could theoretically fix the future problem I'm outlining, unlikely as that seems given the current mindless political climate.

  •  Retire? What's that? n/t (4+ / 0-)

    "And God separated the light from the dark, and did two loads of laundry"

    by Fiddlegirl on Sun Jan 23, 2011 at 03:30:16 PM PST

  •  Retirement Savings Accounts (8+ / 0-)

    are widely known now to be a fucking joke perpetrated by corporate pirates to rob the middle class of their pensions and pocket the cash.

    Someone is making money on your investments while it sits for decades in a bank somewhere.  A ton of money.  But it ain't you.  Guess who.

    I'm not afraid of guns! I'm afraid of the people that obsess over owning them.

    by Detroit Mark on Sun Jan 23, 2011 at 03:58:05 PM PST

  •  'Money' - value created by labor can't compete (2+ / 0-)
    Recommended by:
    daveygodigaditch, Sunspots

    with 'money' created out of thin air by government

    which is why you get near nothing on your hardly earned savings.....

    the sum total of all the 'money' earned by people's labor is negligible compared to all the 'money' we've created out of thin air...   the end result devalues all of it.

    When money is limited and banks and businesses have to seek it out and compete for it, they will pay you for the priviledge of using your savings.  

    When 'money' is created out of nothing and literally given away by government ('loaned' out at near 0%), why should you be paid more for the use of YOUR savings?

  •  Social Security was meant to be a safety net (6+ / 0-)

    not a primary source of retirement income....

    But the gutting of pension plans and conversion of defined benefit plans to defined pay in has led to a massive loss of funds that SHOULD have been safely put away for retirement.

    'Investment' of those funds in the stock market - feeding various bubbles that eventually burst - has further devalued those funds.

    The 'choice' available to most 401K plans is a joke - with fees paid out to 'management' companies further eating up potential retirement savings.

    And just wait until government 'protects' your retirement savings by forcing you to 'invest' a certain proportion in T-bills.....   after all, SOMEONE has to keep buying all that debt so we can keep kicking the economic can down the road... 'cause the Chinese and everyone else have caught on to the giant Ponzi scheme at work and they aren't buying any more.

  •  401K With Federal Interest 2% Over Inflation ? (1+ / 0-)
    Recommended by:

    Everyone gets a 401K. The government promises interest maybe 2% over the rate of inflation.  They basically get to print that money. And maybe it can't be inherited.

    Get all this bullshit about forcing grandma to be a savvy investor out of the equation.

  •  Retire? (1+ / 0-)
    Recommended by:

    I've just about come to the conclusion I will have to work until I die.

    "The work goes on, the cause endures, the hope still lives and the dreams shall never die."

    by rscopes on Sun Jan 23, 2011 at 05:11:10 PM PST

  •  get off my lawn, punk (0+ / 0-)

    and oh Yeah, keep paying into my retirement plan, and your kids, too.  no kids?  get started bucko.

    Those who hear not the music-think the dancers mad

    by Eiron on Sun Jan 23, 2011 at 05:45:02 PM PST

  •  I've been thinking a lot about (4+ / 0-)
    Recommended by:
    reflectionsv37, Eiron, JanL, Mark27

    this for awhile. I used to get great satisfaction watching my IRA grow as I eagerly tried to put in the maximum. (self employed). Most people figured 8 percent would be an average return. I never believed that. I used to think 5 percent and it's easy to do in my head. I would think oh boy I would be getting x amount of dollars a day without touching the principle. Now I don't even imagine any more at less than 1 percent. I've gotten so discouraged I don't even bother putting any in anymore. I was always cautious and kept it in CDs. The last few years I've taken shorter terms, thinking rates would have to rise before a 5 yr. CD came due. I was wrong.

    I'm just shy of 59 1/2 old and lately have been thinking fuck it all I should just start spending it before it gets stolen some how.

    music- the universal language

    by daveygodigaditch on Sun Jan 23, 2011 at 05:46:01 PM PST

    •  Imagine (3+ / 0-)

      being an eighty something woman. With maybe $250K in investments from life insurance and savings.  About $10K a year in Social security .   Sufficiently debilitated to not to be able to return to work force.  
      No raises in 2 years in SS, rent is up 20% in same period.  
      Investments yield about 10K, an income of $20K a year.
      And she worries.  But knows there are people with less than her,and she worries about them, and gives generously.
      Yep, let's give tax relief to   the wealthy, they might be sad if we don't

      Those who hear not the music-think the dancers mad

      by Eiron on Sun Jan 23, 2011 at 05:59:23 PM PST

      [ Parent ]

  •  You are making a serious mistake (0+ / 0-)

    by not investing in the stock market and relying on money market accounts at your (our) age.

    If you don't have a plan to do the hard work of actively managing your own money, such as by investing it in your own business, your next best bet is to diversify in multiple extremely low cost index funds.

    Your friends:

    Clark Howard's Investment Guide

    The Motley Fool

    Hate to break it to you, but all the games in town are rigged for the ultra-connected and by extension, the ultra-rich.  That'll never change.  But just because they do well, doesn't mean you should curl up in a ball and hide under a desk.  I get free meals when I go to my friend's restaurant.  Does that mean you should vow never to eat again?

    Simply yelling, "The Game Is Rigged!" is a poor cop-out for people unable or unwilling to educate themselves about finances and unable or unwilling to do the hard work of creating a viable business as an alternative (eg. buy something below value and sell it at value, buy raw materials and convert them into something of value, or create a service product, etc.)  

    Getting too caught up in conspiracy theories will have a much greater negative impact on your life than the actual conspiracy will.

    With that said, I full agree with you that long term, the attack on wages and simultaneously on retirement benefits is extremely bad news for the US as a whole.  The solution to that is to sound the alert and be actively involved in politics and/or the media.  That will help the system on a macro level, but you need to make the best investment choices on your own on the micro level.  Nothing you do in politics will help with that.

  •  yes, thank you (1+ / 0-)
    Recommended by:

    As far as I can tell, just about everything about the American economy is an unsustainable house of cards, including our retirement structure.  

    I'm just a year younger than you, and I don't see how it is possible that I will ever retire.  I do all the things one is supposed to - put the max with matching into my 401(k) and all of that crap.  But in the end, the stock run-up in the 80s and 90s was a one-time thing, and these investments going in now will barely surpass inflation, at best, barring some sort of crash or inflationary spiral.  And of course Social Security will have long since been discontinued in favor of "individual investment accounts" or some nonsense by the time we are 65 or whatever.

    Hell, if I end up living anywhere worth living I will probably never even be able to buy a house, which of course means that I will have to keep working if nothing else just to pay rent every month.

    My main career career at the moment is to get onto a track where I will be ok with not retiring.  The other thing I am doing is putting my savings into foreign currencies of stable resource exporting countries like Australia and Canada, with sane governments which will probably fare better long term than the US.

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