Gary North’s Reality Check
The National Institute on Retirement Security has issued a report: The Retirement Savings Crisis: Is It Worse Than We Think? There is no question about it; it is worse than we think — way, way worse than we think. It is posted here.
The report is divided into two parts. The first part is clear. It is a careful description of the discrepancy between the retirement plans of Americans and the financial resources available to these Americans to fulfill their retirement plans. The discrepancy is greater than I had imagined. In contrast, the second part is an exercise in utter fantasy. It calls for massive federal programs to increase the amount of capital that private firms invest in employees’ retirement programs. In other words, there is a massive discrepancy between the first part of the report and the second part.
Here are some of the highlights from the first part.
Approximately 38,000,000 working households in the United States do not own any retirement assets. This is about 45% of all the working households in the United States. They do not have an IRA. They do not have a 401(k). They do not have anything. In other words, they have made no plans whatsoever to fund their retirements.
If we take into consideration all households in America, meaning the ones that have no retirement savings and the ones that have some retirement savings, the median retirement account balance is $3,000. Got that? $3,000. Americans believe that $3,000 will carry them through retirement, as long as they continue to let those 3,000 precious dollars grow by wise investing. If we talk about people who are 55 years or older and still in the labor force, the total accumulated retirement savings for all of these people is $12,000 (p. 1). This means they have about 12 years, max, to accumulate 8 to 11 times their annual income by the final year of their careers.
The utter impossibility of this situation should be obvious. This is not a slight shortfall. This is a guaranteed head-on collision inside the American social order. That is because the Social Security system is going bankrupt, which the second part of this report categorically denies. There is no possibility that the dreams and schemes of Americans will be fulfilled by the Social Security system.
Even they could could be fulfilled, the Medicare system’s shortfall will completely bankrupt the federal government anyway. Medicare is a huge expense, and this expense is going to be shifted onto the backs of the families of Americans. In other words, not only is Social Security going to go belly-up, the Medicare system is going to go belly-up. This means that the total burden of the Social Security tax system is going to be imposed on workers, but there is going to be a steady increase in the retirement age for these workers. They will pay into the system, and they are not going to get much out.
Meanwhile, the Medicare system, which has to start at age 65, because the private insurance companies kick everybody out of their programs at age 65, will bankrupt the federal government. There is no question about this. The system is over $220 trillion in the hole: Kotlikoff’s 2012 estimate.
With this as background, consider further statistical indicators from the first part of this report. Factor these into your plans, and especially your plans for what happens in American political life, when the Medicare system will overwhelm the entire federal government, and the Social Security trust fund is empty today, not in 20 or 30 years.
THE COLLECTIVE SAVINGS GAP
The report speaks of a collective retirement savings gap: what is needed vs. what has been saved. Among working households, ages 25 to 64, this range is now somewhere between $7 trillion and $14 trillion, depending on the financial measure. We are talking about the private sector. If we look at existing retirement assets, at least 90% of working households in the United States do not meet the targets (p. 14). Obviously, households that do not have any retirement savings are not meeting the targets. Remember, this is about 45% of all households. But when these households are factored into the total population, then we find that 90% of the population has fallen short, age bracket by age bracket.
(For the rest of my article, click the link.)