America's Retirement Delusion
A recent Gallup poll asked working Americans what they expected in retirement. "Half of Americans think they will have enough money to live comfortably after they retire." This is the first time since before the financial crisis that a majority of Americans have felt this way.
The poll is very revealing about both investing psychology and consumer sentiment. It contains good news and bad news.
Let's start with the good news: Since the March 2009 lows in the equity market, and the nadir in the economic data, there has been a painstakingly slow improvement in psychology across the country. We have seen five years of gradual increases in employment, consumer spending, construction, exports and services. Although no one would say the U.S. economy is having a boom -- we just had first-quarter gross domestic product that showed no growth -- the gains have been impossible to miss. Things are getting better, albeit at a much slower pace than we would prefer. This is the nature of post-credit-crisis recoveries, as Carmen M. Reinhart and Kenneth Rogoff showed in "This Time Is Different: Eight Centuries of Financial Folly."
I am not a big believer in what some have described as the Confidence Fairy-approach to managing economies. If only we fix the sentiment, goes this flawed and backward-looking thesis, then everything will be OK. It is a classic case of confusing correlation with causation.
In reality, when the underlying fundamentals improve, those economic gains lead to a gradual improvement in sentiment. The positive aspect of this for the economy is the possibility of kicking off a virtuous cycle: Senior managers feel a little better about the world and companies begin to do more capital investment and increase hiring. Increased hiring leads consumers to buy more goods and services. The velocity of money increases. This continues until inflation shows, the Federal Reserve raises rates too high and a recession ensues.
We are only in the early stages of the virtuous cycle. Modest increases in employment have brought the total number of full-time private-sector employees back to pre-crisis levels. In other words, we have experienced zero private-sector job growth since 2007. That is a minor victory at best, as it doesn't account for increases in population. And unlike most recovery cycles, state and local governments were a net negative in terms of employment.
Blame the misguided austerity philosophy for slowing the recovery, as layoffs occurred at the worst possible moment in the economic cycle. Had government employment been more like the 2001 recovery, unemployment would be in the 5 percent range (it's 6.3 percent now), and the economy would be expanding at about 3 percent instead of barely growing.
The slow shift in sentiment is a positive for the intermediate-term economic and market psychology. The bad news is that America is still delusional as far as our long-term retirement issues go.
Most people aren't saving enough to pay for retirement on their own. Social Security is funded for the next few decades, but has an anticipated shortfall after that. Unless we see significant demographic changes -- another baby boom or a huge wave of immigration -- some hard choices must be made. The debate includes means-testing, raising the retirement age or increasing the cap on contributions to the retirement system. The amount of gross wages that are taxed for Social Security is $117,000 this year. Keeping the system solvent at present levels probably will involve much heftier contributions. Don't be surprised if that cap rises by $100,000 or more during the next 20 years.
We haven't even touched on the costs of long-term medical care for retirees. It is high, and likely to get higher as boomers age.
With a little increase in economic growth, we might see a significant improvement in the intermediate term. The challenge is to address our long-term needs. I hope our political leaders are up to the task. I see little proof they are.
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