The looming retirement crisis will leave most unable to afford a ‘solid life’

The looming retirement crisis will leave most unable to afford a ‘solid life’

We tend to be data junkies here at Tematica, particularly as they pertain to our 10 investing themes as well as the overall global macroeconomy. In collecting these data points, from time to time, we receive ones that while confirming for our themes do point to problems ahead. In this case, the latest analysis of retirement savings confirms that for the vast majority of Americans, their retirement may not be what they were expecting.

As the collision of our Aging of the Population and Middle-class Squeeze themes intensifies, it is a natural headwind for the domestic economy as retirees adjust their spending to their economic reality.

At Vanguard, the average 401(k) account value for an investor age 65 and older is $192,877 in 2018, but that number is inflated by a small group of long-time super-savers. The median balance among the age group, where half have more and half have less, is a measly $58,035.

Average that out over 20 years — most Americans should expect to live into their 80s — and that is not a lot to pull out on a yearly basis, perhaps a little more than $3,000.

The median private pension was only $9,376 a year, according to the Pension Rights Center (state, local and federal pensions were higher).

That leaves us with Social Security. In 2018, the average Social Security check was $1,422 a month or $17,064 a year.

So let’s add up what our yearly payments are:

  • Personal savings $3,000
  • Pension $9,376
  • Social Security $17,064

Total: $29,440

It’s certainly possible to live on $29,000 a year, particularly if you own your home, have low expenses, and live in a relatively low-cost part of the country.

But it is hardly a robust retirement.

Source: There’s a retirement crisis in America where most will be unable to afford a ‘solid life’

The growing intersection of the Aging Population and the Middle-Class Squeeze

The growing intersection of the Aging Population and the Middle-Class Squeeze

On their own, each of Tematica’s 10 investing themes is pretty powerful, but when two or more of them come together they form some pretty powerful tailwinds and formidable headwinds. Our Aging of the Population investing theme focuses on the demographic shift that we are undergoing and our Middle-Class Squeeze one addresses the economic pressure that many continue to feel due in part to rising debt levels, rising costs and still less than inflation growing wages. These same factors are pressuring older Americans that are living on fixed budgets, and now it seems even their Social Security payments will be hit by unpaid student debt.

Odds are we will see a growing number of older Americans trading down in what they buy and changing where they buy in order to stretch the spending dollars they do have.

 

The share of bankruptcy filers who are older than 65 is the highest it’s ever been.

As the cost of living outpaces incomes, health care costs rise and debt swells, there’s been more than a two-fold increase in the rate of older Americans filing for bankruptcy, according to a new study. “For an increasing number of older Americans, their golden years are fraught with economic risks,” it reads.

Debt among older Americans is rising fast. In 2016, the average debt in families in which the head of the household is age 75 or older was $36,757. That is up from $30,288 in 2010, according to a recent report by the nonprofit Employee Benefit Research Institute in Washington.

The average monthly Social Security check is $1,404, and more than 40 percent of single adults receive more than 90 percent of their income from that check, according to the government.

Older Americans’ debt can threaten this.

The number of Social Security recipients 65 and older who had their check reduced because of their student loans increased by more than 500 percent between 2002 and 2015, according to the Government Accountability Office.

Source: Debt growing for older Americans and so are bankruptcy filings

Aging Americans find Social Security benefits buy 34 percent less than in 2000

Aging Americans find Social Security benefits buy 34 percent less than in 2000

A new report released by the Senior Citizens League showcases the intersection of our Aging of the Population and Middle Class Squeeze investing themes as it reveals “a 4 percent loss in Social Security buying power from January 2017 to January 2018 and a 34 percent decrease since 2000.” Talk about a major ouch for those Middle Class Squeezed Americans that rely on Social Security to make ends meet.

One of the other culprits called out is the list of fast growing expenses for retirees, which includes housing and medical costs such as home heating costs and real estate taxes as well as out of pocket prescription drug costs and Medicare Part B monthly premiums.

We see this thematic intersection as another reason to think slower by older Americans will be an impediment to the economy over the coming years. Remember, the first Baby Boomers are turning 70, which means this will be an economic headwind over the next decade plus.

 

If you feel like your Social Security check doesn’t stretch as far as it once did, there’s a likely explanation for it.Since 2000, the buying power of monthly benefits has fallen by more than a third, according to an annual report released Thursday by the Senior Citizens League, an advocacy group based in Alexandria, Virginia.

In other words, the cost of goods and services common among retirees have collectively risen faster than the cost-of-living adjustment, or COLA, that Social Security recipients get every year.

“People who recently retired might have seen only a [small] decrease in buying power,” said Mary Johnson, a policy analyst for the Senior Citizens League. “But those retired for a long time are feeling the cumulative effect of this.”

About 47 million older Americans receive Social Security. Overall, the benefits comprise about a third of income among those age 65 or older, according to the Social Security Administration.

The annual report from Johnson’s group examines the costs that typically comprise household budgets of older Americans and compares their price change with annual COLAs. Based on those comparisons, the research found a 4 percent loss in Social Security buying power from January 2017 to January 2018 and a 34 percent decrease since 2000.

While COLA increases since 2000 cumulatively have equaled 46 percent — matching inflation over those years — typical retiree expenses grew by 96.3 percent, the study shows. Of the 39 costs analyzed in the report, 26 grew faster than the percentage increase in COLAs from 2000 to 2018.

Source: Social Security benefits buy 34 percent less than in 2000, study shows

Pain Points in Investing – Social Security Number as a case study

Pain Points in Investing – Social Security Number as a case study

The core of Tematica’s investing strategy is to look not only for those long-term forces that generate profound headwinds or tailwinds but it also entails looking for those pain points that create an opportunity for those who can best address them. This was one of the focal points we laid in our book Cocktail Investing. Today we will look at one pain point that a significant majority of us in the United States have experienced – the theft of one’s Social Security number. While many focus on the growing cyber threat, this pain point showcases the breadth and depth of our Safety & Security investing theme.

An individual’s Social Security number has become the cornerstone of all identify verification and is key for everything from opening a checking account to getting a credit card or a mortgage, let alone for a medical treatment in the emergency room. Yet that was never the intention behind it. It was originally intended solely to track the earnings history of workers for benefits upon retirement: talk about scope creep!

Clearly, given the various hacks ranging from Equifax to the U.S. Postal Service to the Social Security Department itself, the Social Security number is poorly suited for identification verification and securing one’s personal finances.

By the way, up until 1972 the phrase: “FOR SOCIAL SECURITY PURPOSES — NOT FOR IDENTIFICATION,” was on the bottom of all social security cards!

This issue appears to be finally getting the attention it deserves.

Earlier this month, the Trump administration’s top cybersecurity official said the Social Security number has “outlived its usefulness.” Last week, a top Republican in Congress introduced a bill that would require the major credit-reporting firms to phase out by 2020 the use of Social Security numbers to verify consumers’ identities.

Clearly, we have a very big pain point here with no obviously viable solutions immediately identifiable or available, which makes this a great pain point to track. A google search for “Alternatives to social security number” generates over 9.2 million results. Most likely the solution will be a combination of biometrics and unique code identifiers and most likely, the solution will not be generated by the U.S. Government as that is not where the pain is most acutely felt. There is no real danger to government officials compared to what is faced in the private sector.

There is already considerable discussions from those in D.C. that things need to change, but we suspect that given the enormous benefit to be gained in the private sector, we will likely see private sector solutions emerge and compete against one another. We already have one massive experiment taking place in India where Aadhar, the world’s largest biometric identification system, has been implemented with nearly 1.12 billion individuals.

Pain also means opportunity and this is one we are watching closely.

Source: Social Security Numbers: Hacked, Hated—and Irreplaceable – WSJ

Let’s talk about more Americans retiring outside the U.S.

Let’s talk about more Americans retiring outside the U.S.

While we’re not ready to call the egress of retired Americans to areas around the globe that are more affordable the intersection of our Cash-strapped Consumer and Aging of the Population themes just yet, it is something we are watching. The “just under 400,000 American retirees now living abroad” is less than 0.5 percent of the US population, but with citizens moving to Texas, Florida, and South Carolina in search of more affordable living, we could see more retirees leaving the US in the years to come as a growing number of baby boomers retire. The impact could be rather interesting for consumer product and personal care companies that have yet to make meaningful inroads abroad.

Just under 400,000 American retirees are now living abroad, according to the Social Security Administration. The countries they have chosen most often: Canada, Japan, Mexico, Germany and the United Kingdom.Retirees most often cite the cost of living as the reason for moving elsewhere said Olivia S. Mitchell, director of the Pension Research Council at the University of Pennsylvania’s Wharton School.

“I think that many people retire when they are in good health and they are interested in stretching their dollars and seeing the world,” Mitchell said.

McCowen’s rent in Ajijic, a community outside Guadalajara near Mexico’s Lake Chapala, is half of what she was paying in Texas. And since the weather is moderate, utility bills are inexpensive.

In some countries, Mitchell said, retirees also may find it less expensive to hire someone to do their laundry, clean, cook and even provide long-term care than in the United States.

Source: Growing number of Americans are retiring outside the U.S.

Inflation is a tricky game

Inflation is a tricky game

On February 19th, the Bureau of Labor Statistics (BLS) recently reported that inflation, as measured by CPI, remains low in the United States at a non-seasonally adjusted 12 month rate of 2.6%.  On February 12th, 2010 Olivier Blanchard, the IMF’s chief economist, called for central banks to raise their inflation targets, perhaps to 4% from the current standard around 2%.  I find it interesting that this recommendation comes as nations across the globe are facing the momentous challenge of controlling the potential time bomb of their “quantitative easing,” a polite term for printing money, while Germany and the EU debate how to bail out Greece.  Remember that debtors love inflation!

The most widely used measure of inflation in the United States is the Consumer Price Index (CPI), published by the BLS.  According to the BLS,

(1)     The index affects the income of almost 80 million people as a result of statutory action

  • 47.8 million Social Security beneficiaries
  • About 4.1 million military and Federal Civil Service retirees and survivors
  • About 22.4 million food stamp recipients.

(2)     Since 1985, the CPI has been used to adjust the Federal income tax structure to prevent inflation-induced increases in taxes.

The BLS calculates CPI using a weighted basket of goods and services, with occasional substitutions to account for changing preferences, using hedonic regression.  There is much debate over the accuracy of the CPI, but it is clear, given the stakeholders mentioned above that there is a potential conflict of interest for the federal government in reporting accurate data.

(1)     The higher the CPI, the more the federal government’s expenses increase, such as Social Security benefits.

(2)     By keeping CPI below the actual rate of inflation, federal tax receipts rise as tax payers are pushed into higher tax brackets through inflation induced wage increases rather than a true increase in purchasing power.  This is illustrated in the example below.

25%  Bracket Reported CPI Wages Actual Inflation
Year 1 30,000 3% 28,000 8%
Year 2 30,900 3% 30,240 8%
Year 3 31,827 3% 32,659 8%
Year 4 32,782 3% 35,272 8%
Year 5 33,765 3% 38,094 8%

Here we have an individual making $28,000 in Year 1.  His/her wage increases along with the true rate of inflation.  Tax brackets are adjusted according to CPI to prevent an individual or family from being taxed at a higher rate due to inflation rather than as increase real wage rates.  Here we can see that if CPI is reported to be 3%, the bottom of the 25% tax bracket increases by only 3% a year while wages increase at 8% a year.  By Year 3 the individual is squarely in the 25% tax bracket although real wage rates/purchasing power has not increased.  So now they are paying higher taxes, although inflation-adjusted income has remained flat.  This means the federal government can increase tax receipts by creating inflation above the reported CPI.  I’m not aware of any government in history that would be able to resist that temptation!

There’s both opportunity and motive for bias and manipulation.  Be skeptical.  The chart below shows the percentage change in CPI as reported by the BLS starting in 1959 vs. the seasonally adjusted M2 as reported by the Federal Reserve.  M2 is currency, traveler’s checks, demand deposits, and other check-able deposits, Money Market Mutual Funds, savings, and small time deposits.  M3 is considered the best estimate of the money supply and includes time deposits over $100,000, institutional money market funds, short-term repurchase and other larger liquid assets in addition to M2, however the Federal Reserve stopped reporting on M3 in March 2006, thus I have used M2 as an approximation.

CPI has not kept up with the increase in the money supply, thus I would argue that CPI has been understating inflation since around March of 1982.  You might recall that the 10 year Treasury Bond hit a high of 15.32% in September of 1981 under Volcker as he sought to combat a brutal inflationary environment with a sharp spike in interest rates.  At this time as well, unemployment had reached a 26 year high of over 10%.

The BLS states that, “As the most widely used measure of inflation, the CPI is an indicator of the effectiveness of government policy.”  Again, the government is incentivized to show lower CPI.  Be skeptical when there are conflicts of interest.