Are You Ready To Work Until You Die?

In the last 150 years, a previously unknown social concept has taken hold in the US and other wealthy countries: retirement. And just as we’re getting used to it, it’s being wrenched away from us.

A century and a half ago, only those who had accumulated great wealth could stop working in their fifties or sixties to enjoy a leisurely retirement. People worked as long as they were physically able to. Once they became too feeble to work, family members cared for them.

Those with no family were generally sent to the poorhouse, a residence where disabled and elderly people were supported by taxpayers. They were expected to work if they were physically able. As you might expect, living conditions were Spartan.

Retirement is possible only because industrialization has helped to facilitate capital accumulation.  This capital can be used to support a person’s needs after a certain age.

Capital accumulation occurs through savings, investment, and economic growth. Unless all three factors exist in sufficient quantities, a society’s ability to provide retirement benefits to older citizens declines.

Unfortunately, in the US, all three factors are moving in the wrong direction:

1. Savings. In the 1970s, Americans saved 9% to 15% of their income. Today, we save only about 4%.
2. Investment. In an era of near-zero interest rates, it’s a lot tougher to generate safe investment returns. When my father retired in 1981, he could buy a certificate of deposit (CD) that paid 14% interest. Sure, inflation was higher in 1981 than it is now. But his after-inflation return on investment was nearly 6% higher than it is today.

1981 inflation rate: 10.3%

1981 three-month CD interest rate: 14%

Net return on investment: 3.7%

2018 estimated inflation rate: 2.38%

2018 three-month CD interest rate: 0.75%

Net return on investment: -1.63%

3. Economic growth. In the 1970s and 1980s, there were six years in which the economy grew at a rate of 9% or higher. Since then, the growth rate has exceeded 5% in only a handful of years. In 2017, the economy expanded at only a 2.3% rate.

The confluence of these factors forces retirees – and anyone thinking of retirement – to save a great deal more money to supplement Social Security and pension income they receive or expect to receive.

Let’s say you start receiving Social Security benefits of $2,500/month in 2017. To live comfortably, you’ve calculated that you need to receive additional monthly income of $1,500. If you earned the 14% interest that you could in 1981, you’d need savings of a just under $130,000 to generate that income. But to generate the same income with a 0.75% interest rate, you need to save $2.4 million – more than 18 times as much! What’s more, after inflation, you’d still be losing almost 2% annually.

And what if you don’t have $2.4 million? You might be tempted to invest in bonds, which have a significantly higher yield than CDs. Let’s say you purchase a 30-year Treasury bond backed by the full faith and guarantee of the US government at 3%. To generate $1,500/month income from an investment yielding 3%, you’d need $600,000. But after inflation, you’d still only be getting a net return of 0.62% – less than one-sixth of what you could have had in 1981.

It gets worse. If you’re depending on Social Security or a traditional pension plan to help you pay for retirement, chances are you’ll never get to retire.

Social Security suffers from a fundamental problem: it’s a Ponzi scheme, referred to in more polite company as a pay-as-you-go system. Benefits aren’t banked for payment to the persons who earned them. Rather, like a Ponzi scheme, early “investors” have first access to the funds. The so-called Social Security Trust Fund doesn’t exist, at least not in the form most people believe it does. It represents only an entitlement to future benefits, financed by future payments from workers.

Ponzi schemes work as long as the numbers of persons paying into the system and those receiving payouts stay in the same approximate proportion. The proportion of people paying into the Social Security system to beneficiaries is now at a historic low. And in the next 25 to 50 years the ratio will go even lower. In 1960, the worker-to-beneficiary ratio was 5.1:1. In 2005, it was 3.3:1. In 2020, it will be about 2.6:1. It is projected to be 2:1 by 2060.

Unfortunately, even that projection is optimistic because millions fewer workers will be paying into the system than even the most pessimistic scenarios estimate. Researchers at Oxford University estimate that a stunning 47% of US jobs could be eliminated in the next two decades.

Bridging the enormous gap between the benefits promised to retirees and the resources available to meet those promises requires a long-term infusion of trillions of dollars. The Board of Trustees for the Social Security Administration (SSA) publishes an annual report on the sustainability of Social Security benefits. In 2012, the board projected that full benefits could be paid through 2038. In 2016, the board projected Social Security would be insolvent in 2035. Meanwhile, the Congressional Budget Office, a non-partisan federal agency, projects an insolvency date of 2029.

This isn’t only a pension issue. Uncle Sam is broke. As I recently wrote, the real budget deficit is around $1.2 trillion annually. And that’s in addition to a $210 trillion fiscal gap between the cost of paying future benefits to beneficiaries of Medicare, Social Security, federal pensions, etc and the funds that are available. And of course, these figures don’t include the cost of the wars Donald Trump or any future president might decide to start in the Middle East or elsewhere.

Social Security will likely need to start reducing benefits well before 2029. In my own retirement planning, I’ve assumed that in a best-case scenario, Social Security will pay half as much as I’ve been promised.

The news is just as bad, if not worse, for other types of defined benefit plans like pension plans that pay guaranteed benefits for life after retirement. Unlike Social Security, pension plans aren’t funded on a pay-as-you-go basis. The money you pay into a pension plan is supposed to be saved, invested, and then paid out to you. Unfortunately, it doesn’t always work that way.

Take United Airlines, for instance. In 2002, the company filed for bankruptcy. Three years later, a bankruptcy court gave the company permission to terminate its four pension plans. The plans were taken over by the federal agency that guarantees pensions, the Pension Benefit Guaranty Corporation (PBGC).

A few years later, I had a consultation with a retired pilot who had worked for United for more than 30 years. He told me that he had been guaranteed a pension of $120,000 annually when he retired. But the maximum pension benefit PBGC can pay is only about $60,000 annually. His pension benefits fell by 50%.

Defined benefit plans for government workers are even in worse shape than private pensions. Between 2005 and 2015 the unfunded liabilities reported by state pension systems nearly tripled – from $339 billion to nearly $1 trillion. That’s $1 trillion in pension payments that governments are legally obligated to make but have no money for. But, as with Social Security, the actual number is much higher. Of course, some government pension plans are better funded than others. South Dakota, for instance, has $1.04 set aside to fund every $1 of its pension obligations. But New Jersey only has 37.5 cents available for every $1 of pension obligations.

That means if you’re wondering who is going to fund your retirement, look in the mirror.

You’re it.

And if you’re like millions of other Americans, you may need to face the reality that you need to work the rest of your life, or you’ll struggle to get by on increasingly meager Social Security checks.

What’s the solution? If you’re not willing to work until you die, and you’re not already wealthy, you need to accumulate as much capital as you possibly can. That means living below your means today to save for the future.

Reprinted with permission from Nestmann.com.

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