View Full Version : Retirees up against debt

01-23-07, 12:04 PM
Retirees up against debt (http://www.usatoday.com/money/perfi/retirement/2007-01-22-senior-debt-usat_x.htm)
January 23, 2006 (Kathy Chu - USA TODAY)

Retirement used to be a time for people to enjoy life without a mortgage or high credit card bills, a time when heavy debts were mostly a thing of the past. Increasingly, that's no longer true. Some seniors are taking on debt in retirement to fund a trip they've always wanted to take. But a growing number are in debt because they have no choice, according to debt counselors and a growing body of research.

From 1992 to 2004, the percentage of households 55 and older with overall debt grew faster than the rate of the overall population. Those 75 and older packed it on most quickly: The average load for those households with debt shot up 160% to an average of $20,234 during this time, according to research by the Employee Benefit Research Institute, a non-partisan group that studies economic security.

Among households 65 and older, the average amount of credit card debt more than doubled from 1992 to 2004, to $4,907, according to Demos, a New York think tank. Seniors' debt levels are catching up to those of younger people.

AntiSpin: Bernanke picked up where Greenspan left off, lecturing Congress recently about the dangers the economy faces due to unfunded social security and medicare benefits. My favorite quip by Greenspan came in response to a question from Democratic Senator Jack Reed of Rhode Island at a hearing February 2006 (http://quote.bloomberg.com/apps/news...d=aLm76TyE5mnQ), "We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power."

The Greenspan and Bernanke solution is for Congress to take the fiscally responsible high road: raise taxes and default on a portion of past promises. Right. Are we supposed to believe that millions of destitute baby boomers who thought they were paying into these programs all their working lives are going to vote in politicians who are going to cut existing benefits? Or maybe the Gen Xers will vote in politicians who will tax them more to cover their boomer parents' shortfall? This Daily News story shows that even at the level of purchasing power of these entitlements today, high relative to what the Fed proposes, with social security and medicare at current levels millions of retiring Americans don't have enough savings and cash flow to live. How about new taxes to help baby boomers defray living expenses in the future which they are temporarily covering with debt now? A tax on energy consumption seems like an inevitable choice, with the dual benefit of creating market incentives for energy conservation and increasing tax revenues. (Energy conservation technologies are an excellent long term investment.)

The optimists say we can invent and grow our way out of debt. If so, we're off to a slow start. One report does not make a trend, but the Conference Board reported yesterday (http://www.ft.com/cms/s/8a3e56f2-aa48-11db-83b0-0000779e2340.html) that: "The US economy last year recorded its lowest rate of labour productivity growth in more than a decade, with growth in output per hour worked falling behind the EU and Japan... Gail Fosler, the chief economist of the Conference Board, told the Financial Times that the fall in productivity growth was unlikely to be cyclical and the result of weaker gains in services’ industries, raising “concerns about the long-lasting productivity impact of information and communications technology”.

Since 1999 I've argued that unless that at some point the US does a "toaster reset" on its foreign debt–permit a 1980s Mexican peso style default via dollar depreciation. It's been done before, and it ain't the end of the world, as I argue in Can the U.S. have a "Peso Problem"? (http://www.itulip.com/faceofinflation.htm) That would be the end of a few persons' worlds, but that's politics for you.

If we have Democrats in both houses of Congress and in the Whitehouse in 2008 when the shit hits the fan, do the odds of a policy of politically expedient inflation rise or fall? Believe it or not, history suggests that it falls.

galbraithmoney, Chapter 10, The Impeccable System, Politicians doing their enemies work:

"No feature of American–to some extent of Anglo-Saxon–politics is so certain as the tendency of politicians to become first the captives, then the agents, of their opposition. In consequence, major initiatives are not taken by those who originally most favour them. Those so captured by an idea are too much in fear of their opponents. The action comes with the opposition accepts the need and wishes to disarm the original proponents. In the 1960s, liberal Democrats in the United States urged peace and international amity but continued the Cold War and plunged the country into Vietnam. They did so partly because they feared being called appeasers and crypto-Communists by the right. Richard Nixon, having impeccable credentials as a Cold Warrior, moved towards peace or accommodation with Moscow and Peking and withdrew, if very gradually, from Vietnam. Thus on foreign policy he outflanked his liberal opposition. When Professor Milton Friedman proposed a guaranteed income for the poor, it was considered (quite correctly) an act of creative imagination. When a Republican administration proposed it to Congress, it was a mark of conservative statemanship. When George McGovern, running for President, advanced a close variant on slightly more generous terms, it was condemned by conservatives as the dream of a fiscal maniac. As known and stalwart defenders of the dollar, the Republicans were able, in the early 1970s, to devalue it not once but twice. For anyone suspected of a more flexible attitude towards the integrity of the dollar, such action would have been exceedingly perilous."
Dems tend to protect the dollar, cut welfare programs, and run fiscal surplusses, all contrary to reputation, a fact worth noting if you are planning election timed asset allocation changes.

01-23-07, 01:06 PM
Dems tend to protect the dollar, cut welfare programs, and run fiscal surplusses, all contrary to reputation....
the new democratic senators - jim webb, sherrod brown, john tester, et al - all ran on "populist" economic platforms. they are worked up about economic fairness. i doubt their idea is to protect the dollar. they're more likely to go after "free" trade and globalization more generally. clinton ended "welfare as we know [knew] it" with a republican congress. expect a democratic majority to work for national health coverage instead. the fiscal responsibility, however, might be for real, with new "pay as you go" mandates on spending or tax cuts. but don't a lot of bush's tax cuts expire in the not-so-distant future? i expect those cuts to sunset, but the recouped revenues to be spent. the result will be "revenue neutral" compared to our present state, but a long way from surpluses. meanwhile, the fed will inflate.

Uncle Jack
01-23-07, 01:56 PM
Predictions in my post on this subject from a few days ago:

Budgeting Predictions from Uncle Jack

Meanwhile, look for the tax package that sunsets in 2010 to actually expire (the sun will set).

Look for the retirement age to be lifted again; itís currently 67 for me, but I expect that to be increased to 71 before I actually get there.

And also look for the current income cap on which social security taxes are paid to either be removed or increased substantially (2006 was $94,200), and those who pay the most will least likely qualify for benefits (deemed the evil rich).

Oh, and by the time theyíre done messing around with the way inflation is measured, gold should be trading for over $5,000/oz., but thatís just a prediction.

Party on, Senators.

01-23-07, 08:20 PM
interesting, but this could be "normal".

I've read several times, most recently from the gavekal people[2], the notion the "negative savings rate" is not a problem, in fact, it's "normal" because historically, older people nearing retirement stop saving and start spending more.

So now, since the elderly are such a huge group, and they have all the money[1] so if they spend theirs and don't save, it looks like everyone is spending and not saving.

That's the contrary view to the post, but I don't believe it -

because now the pollyannas have to explain why this time around, instead of spending their savings, the elderly are spending the savings and at the same time, going further into debt.

[1] (young people have none, a fact i can vouch for, but if you go by me you'll know that when I'm old he reverse will be true - i'm always on the wrong side),

[2] this is in addition to the other argument that if you count house price appreciation as savings, people are actually saving quite a huge amount of money.

a growing number are in debt because they have no choice, according to debt counselors and a growing body of research.

From 1992 to 2004, the percentage of households 55 and older with overall debt grew faster than the rate of the overall population. Those 75 and older packed it on most quickly:

01-25-07, 04:36 PM
I saw the $5000/oz tidbit - and just for kicks looked into what a straight inflation based approximation of 'fair value' of gold would be.

I started with 1979 = 1 and assumed 2007 would have a similar inflation rate as 2006 (3.24%).

With the historical values from 1980 to 2006, plus the assumed 2007 value, overall inflation in 1979 dollars is ~287%.

Given a gold 'high' of $850 in 1980, the 'fair' 'high' (fh) on 1/2008 would be $2441/oz

The average gold price in 1980 was $645.2 for a 1/2008 'fair' 'average' (fa) price of $1852.8

The 'fair' 'low' (fl)? $495.2 in 1980 for a 1/2008 'fair' 'low' $1422

The fun begins when you start to extrapolate inflation in 2008 and on.

Just for kicks, I chose 3 scenarios:

a) Same inflation as the 3 worst years of the '80s: 11.22%, 13.58%, 10.35%

On 1/2011
fh: $3402.6
fl: $1982.3
fa: $2782.95

b) Double inflation as the 3 worst years of the '80s: 22.44%, 27.16%, 20.7%

On 1/2011
fh: $3721.8
fl: $2168.3
fa: $3044.0

c) Half inflation as the 3 worst years of the '80s: 5.61%, 6.79%, 5.175%

On 1/2011
fh: $3243.1
fl: $1889.4
fa: $2652.4

Obviously this is a simplistic approximation of future behavior based on past behavior, but it does show that $5000/oz is actually not inconceivable - especially should inflation significantly exceed the 1980's levels.

Under the 'Peso devaluation' inflation rates, the numbers actually do cross the magic $5000 level very easily. I haven't found an easily accessible graph of Mexico's inflation in a similar time frame, but anecdotal results do include a 105% inflation in 1986 and 159% in 1987 as well as a peso devaluation in 1982.

This does put an interesting perspective on the current price of gold.