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Wednesday, March 9, 2011

76 Million Person Social Security Squeeze Begins NOW

Today:  Celebration of the 2 year Bull Market

Tomorrow:  Socialism

Great article today on where our (yes-- this is a good portion of your paycheck) money is going in today's reality: 

Government payouts—including Social Security, Medicare and unemployment insurance—make up more than a third of total wages and salaries of the U.S. population, a record figure that will only increase if action isn’t taken before the majority of Baby Boomers enter retirement.
Wow...  one third of all the wages are government payouts.  That is a Bigfoot on steroids number, especially when put into comparison with Europe being at 44%.  Yes, Europe is still higher than the Yankee Dollar, but remember that Europe is has always been more socialist in nature. 
Sadly though, this is only the beginning. 
The Baby Boomers start hitting 65 this year.  That means that the 76+ million person army of super consumers are starting to go away.  Is there any chance that ANY GROUP can ever fill the void from the loss of this adrenaline rush of spenders?  I think not and here are a few things to ponder:
  • Social Security will start to be exercised at a much higher rate:  84 Percent of persons 65 and older plan on using social security as a source of retirement.  30% plan on this being the ONLY source of retirement. A boomer will turn 65 every 18 seconds starting in 2011 and by 2037 when the last boomer retires the participation rate is expected to be 2 workers to fund one retiree, opposed to the ratio of 16 to 1 when boomers began to pay into the program.
  • Life expectancy for a boomer is just under 80 years old, opposed to 61 years old when social security was created.  This means the program is being stretched by an additional 19+ years.  By 2017 the program will take in less than it pays out and by 2037 it will only be able to operate at 75% payout. 
  • The US Census says that there will be a 79% increase in people people 65 and older between the years of 2010 and 2030:  This, coupled with the increase in life span will weigh down government health programs.   Average post health care costs are expected to be $33,000 per person (and over $100,000 if the person hits the century mark).
  • Over 12 cents of your earned dollars are paid into social security at today's levels, despite boomers only required to pay around 6 cents of each dollar (about a quarter century of wages for boomers) until 1990.
  • 2010 (dec) Gallop data showed that 60% of future retirees don't see Social Security being available when they reach retirement age. 

Social Security does not get the press it was receiving in 2008 and 2009 when we were at the depths of the recession.  A new found stock bubble (or boom if you take QEII anal suppositories on a regular basis) has muffled the cries of reform for social security and other government programs, but the threat is still as real today as it was 2 years ago when the S&P dipped under that limbo bar. 

In full disclosure, I am a Gen X or Y product (yes, product-- we are Americans capitalists, so lets call spade a spade).  I would consider myself a phenomenal product-- I produce many fiat dollars that enter the economy monthly.  But, as a person I am worried about the social security issue.  I honestly see the ONLY way to fully fund baby boomer's retirement is to steal from my retirement by raising the amount that is paid into the fund.  I also see this being coupled with higher taxes down the road, making retirement harder and harder to achieve for anyone still working. 

I do not have any beef with the boomers (I do have organic beef in my fridge, but no correlation).  The boomers were (and continue to be) phenomenal innovators and a dynamic group of people that I have called everything from 'dad' to 'Senoir Vice President of Operations.'  My generation has been small in comparison to the achievements of the baby boomers-- I mean we hyped snowboarding, social media and created apple wood smoked bacon, but boomers can claim the computer and ABBA... At least the computer was a good idea.  The problem I have with boomers is that there are so darn many of them, they don't die early like their parents (yoga?) and they are a generation of high expectations-- The biggest one being the expectation that their kids can afford to fund their lavish lifestyles into the golden years. 

I think that the recession has put unforeseen bumps in the social security program as well. 

A 2009 article released by the Federal Reserve stated a 47% increase in early social security applications in 2009.  This means more people are NOT paying into the fund.  High unemployment is a double whammy on this scenario--
 less workers = less money being paid into the Social Security fund.

And there really is no end is site to the drones of retirees collecting benefits over the next 20+ years.  The number of retirees that will be in the market will be more than triple that in 1970 and almost double that from the year 2000.

Gov't Handouts take the place of lost housing values: 
housing has lost $10 trillion in value since 2007, with estimates showing a loss to boomers retirement goals of $50,000 to $100,000 per household.  These figures do not take into account 'expected' appreciation (high expectations) from boom levels.  Boomers were under the impression that housing would double every 10 years and many took the McMansion during the boom opposed to keeping lower debt levels and contributing to retirement accounts.  These homes will need to be unloaded at a loss, meaning that any monies put into these homes are lost, as is the potential for this lost money to be put put into retirement accounts. 
Robert Shiller still sees a 25% reduction in housing values from today's levels.  If this holds true, more homes will enter foreclosure and the value of boomers retirement equity will suffer further, creating more of a restraint on government programs. 
This chart from 2008 from Gallop showed that future retirees were very hopeful for home equity being a major source of retirement.  As home equity evaporates, the expected dependence on government funded programs increases.  Unfortunately I can not find more recent data, but I can only expect that the numbers have continued to widen.  If you have any data, please post in comments.

Lastly, lost home values also strip away the largest transfer of wealth from one generation to their children.  But with boomers needing between 15 - 20 years of retirement will there be anything left to hand down?  I think not.

Effect on Stocks?

I can only imagine that stocks will suffer when Boomers are forced to pull their retirements to live on them for years.  I would guess that many a boomer has their magic number in mind to pull their entire portfolio.  I also expect boomers to pull their funds in entirety in full if the market takes another drop.

Dow 13,000?  Dow 14,000?  At some point boomers have to sell-- they will not risk loss again.  The consensus on boomer withdrawal  is that it will happen slowly overtime, but if the market crashes again, I see withdrawals accelerating rapidly from the boomers.

Social Security costs to the workers going up?

2011 actually saw a reduction of pay into Social Security to 4.2% to increase cash into the economy.  This is just stupid.  Social Security is the 76 million person aging elephant in the room and reducing the fund's growth and expecting it to not affect the payouts is about as smart at eating an egg and expecting to give birth to a chicken. 

Beware-- costs will rise for Social Security-- they have to.  This fund was already set to be insolvent in 2037 at the higher tiered deduction.

Sadly, I am in the 60% majority that sees social security, of which I have payed into the max amount out for many years, is dying. 

I will have no social security... You may not as well...

Plan accordingly today!

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1 comment:

  1. I agree that SS is a problem that needs fixing, and sadly I am not able to count on it when I do retire in the future.

    However, I disagree with the investment implications. More people today participate in the stock market than ever before, and that number is growing. Sure, boomers will pull money out, but I bet that it won't quite be at the rate you fear (many boomers still have pensions), and much of their wealth will eventually be passed down to heirs.