On November 14, 2014, Dean Baker writes on Money News:
Many Americans are nearing retirement with only Social Security to support them and a mortgage that is far from paid off — and the situation might be getting worse.
According to Dean Baker, co-director of the Center for Economic and Policy Research, the nest egg that many could once rely on when they sold their homes and downsized has now vanished in a lot of cases.
In a column for Fortune, Baker noted that because home prices are still considerably below their 2007 peaks, the U.S. middle class has had no comparable gains in their household wealth during the current recovery.
“This is a bad picture for the country as a whole, but it is especially bad news for those at the edge of retirement,” he wrote.
“These families do not have time for an economic turnaround to improve their situation. They must rely on the wealth they have accumulated to date to support them in retirement, and that is it. This is not a pretty picture.”
Federal Reserve data show that if a typical U.S. family in the 55 to 64 age group took all their savings and used it to pay off their mortgage, they would still owe more than $50,000 on the median house.
Baker said that the middle quintile of Americans in that age group has only 54.6 percent of their home paid off on average. “By comparison, in 1989, this group on average had equity equal to 81 percent of their house price, meaning that many could look forward to a retirement in which their mortgage was already paid off.”
What’s more that same middle quintile had an average of $169,000 in wealth in 2013 — down an alarming $150,000 from the group’s peak wealth in Fed data from 2004.
Baker said Americans in the 55 to 64 age group who are below the middle quintile in wealth have done even worse in recent years.
“As a result they will be overwhelmingly dependent on Social Security and Medicare in their retirement years. Those who envision a population of affluent elderly who can easily get by with cuts in these programs are not looking at the data,” he concluded.
According to the National Institute on Retirement Security, 45 percent of working households have no retirement savings at all, according to U.S. News & World Report. In fact, among people 55 to 64, average — as opposed to median — household retirement savings total only $12,000.
The problem is that the average Social Security payment for retired workers in 2014 is approximately $1,300.
“The rule of thumb for retirement accounts is that you should withdraw no more than 4 percent a year. If you have $100,000 in savings, that means $4,000 a year, or about $333 per month,” U.S. News said.
Even among those Americans who do have savings, they are keeping much of it in cash instead of stocks or related investments, which ensures their holdings barely grow at all at today’s interest rates,
CBS Moneywatch reported.
“So the longer that they are holding cash, the further and further they are getting behind in saving for their future,” Robert Kapito, president of BlackRock, told CBS News.
I’ve said it before and I’ll say it again: It’s great to be unemployed and retired if you can afford it!
There have been numerous proposals, including President Obama’s MyRA program and senator Tom Harkin’s proposal for the Universal, Secure and Adaptable (USA) Retirement Funds Act of 2014, to address eroding retirement security.
Both proposals are yet more attempts to address the fact that Americans are not saving enough for retirement. But the proposals fall far shot by “trillions” of dollars.
The plain truth is that more than four in five older Americans expect to keep working during their latter years, a sign that traditional retirement is out of reach for vast swaths of society. According to a new survey poll conducted by the Associated Press-NORC Center for Public Affairs Research, among Americans ages 50 and older who currently have jobs, 82 percent expect to work in some form during retirement.
In other words, “retirement” is increasingly becoming a misnomer.
For those who have been dependent on employment and/or welfare, the problem is that financially sustainable retirement is and will no longer be a reality. Even with Social Security, which is funded through payroll taxes called the Federal Insurance Contributions Act tax (FICA) and/or Self Employed Contributions Act Tax, (SECA), one must have had a job to be eligible for the entitlement––and the amount of Social Security is based on the income level generated from one’s employment record of payroll tax contributions.
Employer-provided pensions continue to decrease and personal savings is not the norm among the vast majority of American households who must spend virtually every earned dollar on living expenses. While increasingly individuals are finding it necessary to continue working in retirement to supplement their income, most older Americans discontinue full-time career work and struggle to meet obligations with minimum-pay part- and full-time jobs. A proportion of retirees also receive income from welfare programs, such as Supplemental Security Income and other life-support services funded through tax extraction and government debt.
This perspective should serve as the “reality” from which to explore prospects for effectively dealing with eroding retirement security.
Senator Harkin’s proposal has all the downsides of the “MyRA” and nothing to recommend it. It claims it offers lifetime income security funded out of current savings, meaning further reductions in consumption out of already inadequate incomes. It also aggregates everything into a “private sector” institution that is custom designed to be “too big too fail.”
As with President Obama’s MyRA proposal, Senator Harkin’s proposed Universal, Secure and Adaptable (USA) Retirement Funds Act of 2014 will not succeed in providing any real, substantial retirement security for the majority of Americans whose jobs do not earn more than substance week-to-week and month-to-month wages. Both plans are designed to encourage Americans to save for retirement and require personal savings and denial of consumption. This is unrealistic given that the Americans with the least opportunity must reduce what is inadequate consumption income in order to accumulate savings for retirement, which for most Americans will be inadequate.
Does anyone really believe that the interest rate to be paid under these programs will be sufficient and able to avert the decline in the value of the money as the government continues to flood the economy with increasingly non-asset-based debt?
Both proposals rely on the requirement to reduce consumption in the economy at a time when what is needed is expansion of the economy supported by increased consumption.
As my colleague Michael Greaney at the Center for Economic and Social Justice (www.cesj.org) states, “under the prevailing Keynesian paradigm, of course, ‘saving’ is always defined as the excess of income over consumption. If you want to save, then, the iron assumption of Keynesian economics is that you must consume less.”
The American consumer is being put into an impossible situation of being asked to consume more to drive the economy and reduce saving, and at the same time are being told they must reduce consumption dramatically in order to accumulate sufficient savings for retirement.
Of course, the whole problem would go away if we financed both retirement and wealth-creating, income-producing physical productive capital needs out of “future savings,” thereby increasing the capacity to consume and support the economy while simultaneously building financial security for every American citizen.
A far better and productive approach would be to create a new way for working and non-working Americans to start their own retirement savings: MyCHA. CHA stands for Capital Homestead Account. It would be a super-IRA or asset tax shelter for citizens. The Treasury should start creating an asset-backed currency that will enable every child, woman and man to establish a CHA at their local bank to acquire a growing dividend-bearing stock portfolio comprised of newly-issued stock representative of viable American growth corporations to supplement their incomes from work and all other sources of income.
We can create new asset-backed money for investment through the existing but dormant Section 13(2) rediscount mechanism of each of the 12 regional Federal Reserve banks that would be backed by “future savings” (that is, future profits from higher levels of marketable goods, products, and services).
The CHA would function as a savings and income account that effectively would build a nest egg over time, using interest-free, insured capital credit loans. A CHA would be offered to EVERY American, whether employed or not. Of course, those employed may also have additional opportunities to acquire personal ownership in their companies using an Employee Stock Ownership Plan (ESOP) trust financial mechanism.
The CHA would process an equal allocation of productive credit to EVERY citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets. The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets as well as the future marketable products and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy. Risk of default on each stock acquisition interest-free loan would be covered by private sector capital credit risk insurance and reinsurance, but would not require citizens to reduce their funds for consumption to purchase shares. There would be no prerequisite requirement to qualify for an annual set capital credit loan other than American citizenship.
This idea to stimulate economic growth and provide retirement security for EVERY American is based on the premise that what is needed is for the system to facilitate spreading the ownership of productive capital more broadly as the economy grows with full payout of dividend earnings, without taking anything away from the 1 to 10 percent who now own 50 to 90 percent of the corporate productive capital wealth assets. In doing so, the ownership pie would desirably get much bigger and their percentage of the total ownership would decrease, as ownership gets broader and broader.
This would benefit the traditionally disenfranchised poor and working and middle class, who are propertyless in terms of owning productive capital assets. It would also result is tremendous economic growth, which would benefit everyone including the already wealthy ownership class, and create opportunities for real jobs, not make-work as an expanded economy is built that can support general affluence for EVERY American citizen. Thus, as productive capital income is distributed more broadly and the demand for products and services is distributed more broadly from the earnings of capital, the result would be the sustentation of consumer demand, which will promote economic growth. That also means that over time, EVERY child, woman and man could accumulate a diversified portfolio of wealth-creating, income-producing productive capital assets to provide economic security in retirement and not be dependent on having to work during retirement or rely on government-assisted welfare.
One might ask how we failed to grasp the significance of productive capital’s input and the necessity for broad private sector individual ownership? Unfortunately, ever since the 1946 passage of the Full Employment Act, economists and politicians formulating national economic policy have beguiled us into believing that economic power is democratically distributed if we have full employment––thus the political focus on job creation and redistribution of wealth rather than on full production and broader productive capital ownership accumulation. This is manifested in the belief that labor work is the ONLY way to participate in production and earn income. Yet, the wealthy ownership class knows that this notion is idiotic.
In real productive terms, productivity gains are the result of tectonic shifts in the technologies of production, which consequently eliminates the need for human labor, destroys jobs, and devalues the worth of labor.
One should ask what form would the structural reforms take. Employment in this new enlightened age would start at the time one enters the economic world as a labor worker, to become increasingly a productive capital owner, and at some point to retire as a labor worker and continue to participate in production and to earn income as a productive capital asset owner until the day you die. As a substitute for inheritance and gift taxes, a transfer tax would be imposed on the recipients whose asset holdings exceeded $1 million. This would encourage those owning concentrations of productive capital assets (effectively the 1 to 10 percent) to spread out their monopoly-sized estates to all members of their family, friends, servants and workers who helped create their fortunes, teachers, health workers, police, other public servants, military veterans, artists, the poor and the disabled.
Other stipulations for the structural reform would entail tax policy reform to incentivize corporations to pay out all profits to their owners as taxable personal incomes to avoid paying stiff corporate income taxes and to finance their growth by issuing new full-dividend payout shares for broad-based individualized employee and citizen ownership with full-voting rights.
We need to encourage the insurance industry to expand their product lines to market Capital Credit Insurance to cover the risk of default for banks making loans to Capital Homesteaders under the proposed Capital Homestead Act. Under the provisions of the Act, risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance issued by a new government agency (ala the Federal Housing Administration concept), but would not require citizens to reduce their funds for consumption to purchase shares.
The end result is that ALL American citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing our country’s trend where all citizens are becoming more dependent for their economic well-being on the “state,” our only legitimate social monopoly.
Implementing the Capital Homestead Act would significantly empower ALL Americans to accumulate over time a viable, diversified ownership portfolio in our nation’s growth companies and create a truly unique, global-leading just and environmentally responsible Ownership Society that fosters personalism, creativity and innovation. Embarking on a new path to prosperity, opportunity and economic justice will expand growth of our market economy in ways that democratize future ownership opportunities, while building a future economy that can support general affluence for EVERY American.
In conclusion, both President Obama’s MyRA and Senator Harkin’s USA programs would be completely unnecessary if we had Capital Homesteading. President Obama, Senator Harkin and other elected representatives should instead advocate for the passage of the Capital Homestead Act.
See two references to the proposed Capital Homestead Act at http://www.cesj.org/homestead/index.htm and http://www.cesj.org/homestead/summary-cha.htm.
For more on how to accomplish such structural reform, see “Financing Economic Growth With ‘FUTURE SAVINGS’: Solutions To Protect America From Economic Decline” at NationOfChange.org http://www.nationofchange.org/financing-future-economic-growth-future-savings-solutions-protect-america-economic-decline-137450624 and “The Income Solution To Slow Private Sector Job Growth” at http://www.nationofchange.org/income-solution-slow-private-sector-job-growth-1378041490.
