Delusions of Retirement Adequacy

I almost called this “EBRI Says Workers Are “Clueless” About Retirement Needs” but then that would have given the whole thing away too soon.

The issue we are discussing today comes to us from MacroMaven’s Stephanie Pomboy, via Alan Abelson in Barron’s. The subject: Our vastly underfunded public and private retirement system(s).

It seems there is a surprising disconnect between reality and what the respondents in the Employee Benefit Research Institute (EBRI) latest retirement survey seem to believe. Workers have a rather unwarranted expectation of actually being able to afford retirement — despite seeing their retirement savings rate shrink. In 2009, it fell from 65% to 60%.

Here’s Abelson with the specifics:

“Perhaps something like 40% of workers may not be saving because they believe assets — their house or portfolios, for example — will once more increase in value. In that regard, she speculates that it is significant that the last time households saved so little for retirement was when the stock market hit its peak in 2007 (and, of course, housing hadn’t yet crashed), and the only time they saved less was in 2004, when stocks bounced back strongly from the collapse.

If workers are really making this kind of bet, she believes, it would be good news, near term, anyway. For it would avoid the big hit to spending necessary to bring savings into alignment with current net worth. To return to an 8% rate, she reckons, would require a savings increase — or a spending decrease — of $513 billion. Nice piece of change, any way you look at it.

However — and, of course, there’s always a however — if the rebound in net worth proves illusory and the Fed can’t reflate assets on the household balance sheet, then, Stephanie sighs, “we’re in a dilly of a pickle.” And the price of delusion, she fears, will be dear. According to the EBRI survey, a “staggering 27% of workers have saved less than $1,000 toward retirement.”

She can only hope the 27% are young’uns right out of school, sharing apartments and still scraping to come up with the rent. Alas, the survey doesn’t break down the numbers by age.

If, by chance, the panel is representative of the nation as a whole, she winces, with 54% of the labor force over 40, “the figures are truly alarming. Doubly so given the increasingly retractable nature of pension promises.”

Ordinary people can be excused to some extent for not grasping how deep a financial hole they’re in. But that doesn’t hold for banks, Stephanie asserts, whose “affliction is no less acute.”

She cites the notion that reserving for losses no longer need be done and, by way of evidence, notes that a $10 billion reduction in the banks’ loss provisioning last year was a major contributor to their gain in fourth-quarter earnings. Further, loan-loss reserves cover barely over half — 58%, to be exact — of loans past due.

And to make matters worse, at the end of last year, 51% of commercial-bank assets were tied to real estate. Obviously, not a very desirable exposure with housing back in the dumps. And finally, there’s the possibility that banks are forced to mark to market all the toxic securities they carry at cost. If they were to follow the example of the FDIC, which in a sale last week marked down a batch of kindred securities, they’d have to take a 50% haircut.

What might this mean? I expect over the next decade, there will be significant changes to Social Security.  We’ll save that discussion for another time . . .


Kiss Zero Interest Goodbye?
Barron’s March 22, 2010

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