Terrifying Fact of the Day
Posted on March 19th, 2013 in Uncategorized | 11 Comments »
Fifty-seven percent of U.S. workers surveyed reported less than $25,000 in total household savings and investments excluding their homes, according to a report to be released Tuesday by the Employee Benefit Research Institute.
The WSJ.
I’ve been seeing a lot of similar data lately, and I think this is a really grave crisis. Strangely, the Journal article doesn’t specify how close to retirement those workers are. (If you’re 25 years old, $25, 000 in savings if pretty good.)
But if you’re near retirement, $25, 000 in savings and investments outside of home ownership is essentially zero—the annual return on it is maybe a thousand bucks— which means surviving on Social Security in retirement, because who gets a pension anymore, except maybe municipal employees—if you ever even get to retire—which is very, very difficult to do. Which means, because health care is so expensive and hard to access, that we’re going to see longevity determined by wealth (or lack thereof) more than at any time in human history. It also means that the generation following these retirees will receive virtually nothing in the way of inherited wealth, something that has helped past generations move up in the world, economically speaking.
How on earth will 57% of American workers survive on home equity, Social Security and $25k?
11 Responses
3/20/2013 4:29 pm
The article you cite is a good example of the decline and fall of standards at the wsj. The article combines a sensational headline with a small self-report survey coupled with two anecdotes. Where are the data?
3/20/2013 8:40 pm
As you point out, the stat is meaningless unless it allows us to figure out what people have at age 60 or so. Also, many of these people can liquidate and move into smaller houses or retirement communities.
Also, Social Security is not nothing. For many people it is very far from it.
3/21/2013 4:17 am
At Anon:
The WSJ’s standards have declined substantially.
Why then does the president of Harvard give an interview, about the admissions practices at Harvard, with a Murdoch publication?
http://live.wsj.com/video/what-harvard-looks-for-in-a-student/76EC5710-3B40-4C0A-99FB-2014E30991BF.html?KEYWORDS=drew+faust#!76EC5710-3B40-4C0A-99FB-
2014E30991BF
http://online.wsj.com/article/SB10001424127887323415304578370010294146142.html?KEYWORDS=drew+faust
3/21/2013 8:20 am
http://www.federalreserve.gov/releases/housedebt/default.htm
This provides some data on the balance sheets of households today. The share of disposable income devoted to debt service (the sum of interest payments and retirement of principal) is at 10.38% the lowest it has been since 1979. The sum of debt service and rent, now 15.48% of disposable income, is as low as it has been since 1981. Surprisingly, perhaps, it his homeowners whose debt service obligations (the sum of their consumer and mortgage debt service - 13.60% of income) are at a generational low. Those of renters are about normal.
3/21/2013 12:20 pm
Even if these figures deserve to be challenged, it is still notable how much American weddings cost- close to $30,000. http://www.huffingtonpost.com/2013/03/07/cost-of-a-wedding_n_2831445.html
3/21/2013 4:37 pm
@ Art Deco
Thanks for providing the numbers.
One of the reasons that disposable income devoted to debt service is so low is because of all the refinancing of mortgages in the last ten years and particularly in the last four with Bernanke’s ZIRP.
Zero interest rate policies are artificial and, no matter what Paul Krugman says, will lead to a disaster in the financial markets and the economy… the only question is when.
Anon, while the WSJ article is incomplete because it doesn’t specify the average age for the people who have saved $ 25,000, you can be quite sure that the age is at least 50 and might even be 60 plus. Frightening. This happened because Americans believed that someone, somewhere, would always take care of them, and that they could go out and buy “stuff” and didn’t have to save for retirement. It’s a mindset that still exists in the U.S. (they forgot Dickens) and even more so in Europe. Again, it will end badly.
The Harvard faculty of a certain age is right up there with those who have not saved enough. Harvard never likes to be left out of anything. With regard to the faculty, the reason is twofold.
First, the faculty at Harvard, en mass, had a huge proportion of their retirement funds in cash in the great bull market from 1982-2000. Think about it. Eighteen years of having 20%-30% or more sitting in cash when both bonds and stocks were “shhoting the lights out.” What were the faculty thinking (and this included some professors in the Economics department)? They got a regular paycheck. They merely had to make a checkmark in order to say where their retirement money was to be invested. They had long periods of time in which to invest, very long periods. Why cash? How could such brilliant people be so stupid!? There should be a requirement for new faculty to take a course that emphasizes the beauty of compound interest and dollar cost averaging of equities. Don’t let them teach without completing the course. This is all really sad. Faculty who came on board in 1982 (and before) having a good amount of their 401K funds sitting in cash and here in 2013 and beyond can’t stop working even though many would like to do so.
Second, the panic that occurred in January, February and early March of 2009, when many investors were selling their equities, occurred at Harvard as well. Now that the market is back to where it was in October 2007, people are buying. Buy high, sell low… what a way to make money (sarcasm is intended). It’s always been that way because people don’t realize that you get better value when you can buy a company for less, rather than more. “Mr. Market” often gives you that opportunity. A number of my friends on the faculty wanted to be part of the buy high, sell low crowd because they felt better when things were good and didn’t feel so well when things were seemingly falling apart. They had no perspective. What will happen because of this is that more professors will stay on past their “sell by date” because they do not have enough money to retire. Again, really sad.
@ SE. You’re correct. Social Security is not nothing, but even at its max, it is not a lot for most people.
3/22/2013 7:25 am
Here’s something for Harry Lewis, Howard Gardner and others worried about the character of today’s undergraduates:
http://www.insidehighered.com/news/2013/03/22/cheating-scandal-kills-4-harvard-quiz-bowl-championships
3/22/2013 7:43 am
I refuse to drink the Austrian Kool-Aid.
Again, the debt service is the sum of interest charges and the retirement of principal. It is influenced by prevailing mortgage rates, not determined by them. The nominal value of outstanding mortgage debt has fallen by 12% since 2008. The ratio of the nominal value to nominal domestic product has fallen by 19%.
The ‘zero’ interest rates are not contemporary mortgage rates, but the rate the Federal Reserve is charging its member banks for loans. Total borrowings from the Federal Reserve are now under $400 million, back to what they were in November 2007. The potential disaster we face arises not from the Federal Reserve’s current discount rate, but from the possibility of a failed bond sale.
3/22/2013 8:53 am
Don’t drink the Austrian Kool-Aid, but get ready for the consequences even with PK’s thoughts to the contrary. Let’s see how his former colleague unwinds The Fed balance sheet. It will be very ugly.
You are aware, aren’t you, that because of the artificially low interest rates (ZIRP), 30 year mortgage rates at various times during the last year, have been the lowest ever. I’m sure you are also aware that ZIRP has enriched Wall Street and penalized savers and retirees.
3/22/2013 6:14 pm
The NYT decided against running a story on the topic of cheating and basketball. Here’s a statement that I gave to the reporter:
In the aggregate Harvard students are amazing. What I’ve learned in the last months is the power of institutional culture. Depending on the signals on campus, students can be nudged in the directon of exemplary behavior, on the one hand, or on ruthless cutting of corners on the other. Those of us who ‘lifers’ on campus have a special responsibility to set a positive model and to indicate explicitly when lines are being crossed that should not be crossed
3/22/2013 6:54 pm
Thanks, Howard. I got a message from the Times to call but didn’t pick it up till after TM’s deadline. I’m not sure juxtaposing the basketball win and the Quiz Bowl cheating is the way to do this, but agree we need to keep asking questions about a lot of the things that have not been done well in recent months and years, and yes, about lines that have been crossed at various levels.