In its August report, the Employee Benefit Research Institute published new data on the account balances of America’s retirement savers, summarized in the chart below.  The results are, shall we say, disappointing.Giving American savers the benefit of the doubt, let’s ignore the bear-market-ravaged 2009 figures and focus instead on 2007.  After five full years of strong bull markets in virtually ALL asset classes, the average 45-54 year old had only $50,000 in his 401(k) retirement account.  55-64-year olds, having the benefit of another decade’s worth of saving, had managed to accumulate an average of $81,000.

There are a couple points worth making here.  First, this illustrates what HS Dent has been saying for years: Americans do not begin to seriously save for retirement until their late 40s to early 50s, when their children have begun to leave the nest.  The problem with this is obvious.  Waiting so late to save and invest, middle-aged investors miss out on two decades or more of compounding.   Try as you may, you cannot make up for two decades of lost compounding by saving more aggressively in your 50s.  The math just doesn’t work out.

Meanwhile, Deutsche Bank estimates that half of all American mortgages will be underwater on their mortgages by 2011, meaning that the house isn’t an asset at all, but a liability.

With little home equity and 401(k) balances embarrassingly small, the retiring Baby Boomers will have to depend on other savings they might have (which are also pitifully small) or, more likely, their Social Security checks or private pensions.  This doesn’t end well.

Charles Sizemore, CFACo-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Exhibit A - The 2009 Annual Report of the Board of Trustees of the Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (in other words, a report on how Medicare is doing).  The diagnosis?  Not good.  The program has been in ill health since 2003, and has operated in a deficit since 2005.  At this rate the program will use up all of its surplus funds by 2017, much sooner than anticipated.

 But wait, where are those “surplus funds?”  Ah, they are squirreled away in special government bonds, meaning there is no surplus funds, instead the trust funds are just one more holder of US govt debt.  We all knew this, but it is worth repeating.

Exhibit B - The oddity of the current health care reform debate where Republicans respond to Democrat bills with a “Senior’s Bill of Rights” that further cements the place of Medicare Benefits with Social Security benefits as sitting on the third rail of politics.  

When the party that historically (not recently, by any stretch) is associated with fiscal restraint works to make sure that the level of benefits offered by a bankrupt program cannot be adjusted, we have a problem.  Again, we already knew this, but worth repeating.

Over the past decade as I’ve given speeches and interviews regarding our research, I have occasionally been asked about these unsustainable programs.  What will be done?  My answer was always the same, “Absolutely nothing, until the economic pain is so great that everyday Americans stand up and demand that their elected officials change the systems.”  We are not there yet.  Americans are standing up, but too few are calling for what we need - rationing. 

You read that correctly - rationing.  We need limitations set on the level of benefits that will be extended by the national treasury.  It doesn’t matter what the program, there must be a limit to what level taxpayers are on the hook to fund any program.  This is the only responsible way to approach any issue funded through the government.

The problem with rationing anything is that it sets the stage for what happens next - those with extraordinary assets are able to get more than the rationed level of benefits and class warfare ensues.  This is the real fight.  So far, we are still rich enough and optimistic enough to have politicians that gloss over the funding aspects of healthcare and give a wink and a nod to notions of rationing. 

We’ll get there, but it’s not today.

Whenever we hear talk of the solvency of the “Social Security trust fund,” we’re not sure if we should laugh or cry.  Consider today’s New York Times headline: “Recession Drains Social Security and Medicare.”

The Times writes, “the Medicare fund that pays hospital bills for older Americans is expected to run out of money in 2017, two years sooner than projected last year.  The Social Security trust fund will be exhausted in 2037, four years earlier than predicted…” Read the rest of this entry »