If Pensions Fail, Retirees will be “Off Their Rockers” (Photo credit: robinrkc)
The National Seniors Council (NSC) republished the following article (“Obama Begins Push for New National Retirement System”) after President Obama’s recent reelection:
“A recent hearing sponsored by the Treasury and Labor Departments marked the beginning of the Obama Administration’s effort to nationalize the nation’s pension system and to eliminate private retirement accounts including IRA’s and 401k plans.
“The hearing, held in the Labor Department’s main auditorium, was monitored by NSC staff and featured . . . one representative of the AFL-CIO who advocated for more government regulation over private retirement accounts and even the establishment of government-sponsored annuities to take the place of 401k plans.”
Wikipedia:
“In the United States an annuity contract is created when an insured party, usually an individual, pays a life insurance company a single premium that will later be distributed back to the insured party over time. Annuity contracts traditionally provide a guaranteed distribution of income over time, such as via fixed payments, until the death of the person named in the contract. . . . Variable annuities have features of both life insurance and investment products. In the U.S., annuity insurance may be issued only by life insurance companies. . . .”
The government’s proposed life “annuity” program has the advantage of being guaranteed by the federal government. I.e., suppose a senior citizen had saved $300,000 during his working life and held his savings in the form of a 401k or IRA. Suppose the financial entity administering his private retirement program became bankrupt. The senior’s 401k/IRA might be lost.
But if he’d put his savings into the government’s life annuity plan, his savings couldn’t be lost because the government could never fail (right?). He would therefore be guaranteed to receive a monthly annuity payment from the government every month for the rest of his life.
But the government’s proposed annuity program was also dangerous. Suppose our senior citizen deposited $300,000 with one or more private entities that that managed his 401ks and IRAs. Suppose they didn’t go broke. Suppose he died when he still had $150,000 left in his private retirement accounts. That $150,000 would go to his heirs or assigns.
But if our senior citizen invested his $300,000 in the government’s annuity program, and if he died after the government had only repaid him $150,000 in the form of monthly annuities, the remaining $150,000 would go to the government rather than the man’s heirs and assigns.
NSC fears that under the proposed law, Americans might be compelled to place their retirement savings now into a government annuity program in return for government’s promise to repay those savings later.
But can our cash-starved government be trusted to not immediately spend those savings? To not inflate the currency so as to repay later with cheaper dollars? To not collapse and leave the retirees penniless?
The National Seniors Council (NSC) says No—the government can’t be trusted:
“According to NSC National Director Robert Crone, ‘It is clear that this is the first step towards a government takeover [that] would effectively end private retirement accounts in America. Lobbyists want the government to require that ultimately all Americans buy these government annuities instead of saving or investing on their own. Already there is a bill requiring all businesses to automatically enroll their employees in IRA plans in which part of every employee’s paycheck would be automatically deducted and deposited into this account. If this passes, the government will be just one step away from being able to confiscate all these retirement accounts.’
“‘This new government annuity scheme, even if it is at first optional, will turn into a giant effort to redistribute the wealth of America’s older citizens. Now that Barack Obama has been reelected he’s going to push harder than ever to seize private retirement accounts.”
Whether the NSC’s concerns are justified or exaggerated remains to be seen. Whether the federal government is truly seeking to seize retirees’ savings is unknown. Still, the threats to do so are plausible. After all, government has persistently robbed its creditors—and especially senior citizens—with inflation for at least 40 years.
One way or another, retirees’ pensions are in jeopardy.
• InflationData.com published an article entitled “Inflation’s Effect on Retirement Savings”:
“Losing your money to inflation is actually much scarier than losing your money to a stock market crash. Stock market crashes are rare, but inflation is inevitable.”
Not exactly.
Monetary inflation with a gold or silver-based currency is not impossible, but it’s extremely rare and is not “inevitable”.
However, inflation with a fiat monetary system is “inevitable” because, inevitably, the government that imposes a fiat monetary system does so for the ultimate purpose of causing inflation to rob its creditors. Monetary inflation isn’t an “inevitability” so much as a political choice. It is “inevitable” that a corrupt or irresponsible government that imposes a fiat currency will ultimately resort to inflation.
InflationData.com continues:
“As time ticks on, the purchasing power of your dollar decreases due to increases in the costs of goods and services, so whatever money you set aside for retirement needs to be growing over time to keep up with inflation.
“When you consider the increase in prices of everything from food to clothing to utilities to rent, inflation really does make a difference in how far your dollar goes and over the longer term it can significantly reduce purchasing power. Typically, inflation doubles prices every 20-30 years but, with lengthening life spans, retirement can easily last 30 years.”
And therein lies inflation’s threat to retirees: Inflation can effectively “rob” retirees of the purchasing power of their savings and Social Security and leave them impoverished in their old age. It’s no fun to be old, but it’s painful to be old and poor.
The “typical” inflation rates that InflationData.com warns about are between 2% (which causes prices increases of about 50% over 20 years) and 3% (which causes 80% price increases in 20 years). Imagine a man who’d paid off his house, was eligible for Social Security and had saved $200,000 to supplement his 30 years of retirement. If inflation pushed prices 80% higher over the first 20 years of his retirement, his savings might be gone after 20 years and he might be left to survive on only Social Security (also diminished by inflation) for the last ten years of his life. Faced with higher property taxes and/or maintenance fees, he could easily lose his house.
But inflation rates that are higher than “typical” are possible but already happening. For example, although government claims the current inflation rate is about 2.16%, John Williams at ShadowStats.com reports that the real inflation rate is currently about 5.8%
If Williams is right, and if that 5.8% rate of inflation were sustained for another 20 years, prices would increases over 300%. Our retiree’s $200,000 might be wiped in in 10 years rather than 30. If he lived, he might have to spend his last 20 years in poverty. And if we see hyperinflation, the retiree’s savings could be wiped out in 3 years—maybe less.
InflationData.com continues:
“You must understand the importance of finding a way to grow the money you save for retirement, because due to inflation the amount you save now won’t have the same spending power 30 or 40 years down the road. It is also important to note the current social security crisis; it is no longer safe to assume that your SSI check will be substantial enough to bridge the gap.
“While there are several different ways to save for retirement, it is really important to invest some of your money in the stock market. Although stock performance is volatile and a high rate of return is not guaranteed, historical data has shown that the stock market generally yields a better return on investment than most other investment or savings tools.”
It’s absolutely true that you must find a way to “grow” your savings during a period of inflation. But if the “importance of investing in the stock market” is conventional wisdom, it’s also crapola. Consider this: since A.D. 1971, the price of gold has increased from $35 to $1725—by 49 times. Since A.D. 1971, the Dow Jones Industrial Average has increased from 1,000 points to 13,000 points— by 13 times. $20,000 invested in the Dow in A.D. 1971 would be worth about $260,000 today. If you’d put the same $20,000 into gold, it would be worth almost $1 million. Over the past 41 years, gold outperformed the Dow Jones by almost 4 times. That’s a track record.
InflationData.com continues by advising seniors to diversify their investments.
“Nearly everyone has heard this advice; diversify your investments. Put a little in bonds, a little in stocks, a little in real estate, etc. Slow and steady investments are the best option for retirees who will eventually depend on the money for income.
“Inflation’s effect on your dollar’s spending power over the years means that if you don’t start investing the money you are saving now, retirement may not be as relaxing as you expected.”
“Diversification” is more conventional wisdom, and I won’t argue against it. But I can’t help wondering if diversification is playing to win or playing to not lose.
I.e., if you put some of your money into stocks and some into bonds, you’ll probably lose money over the next 5 to 10 years. If you put some of your money into real estate—you might profit, but that profit may not appear for most of the next 5 to 10 years. By diversifying, you’re betting that at least some of your investments will make money—but you’re also admitting that at least some of your investments will lose money. We diversify because we lack sufficient confidence, knowledge, intelligence and/or courage to pick a truly strong investment and essentially “bet the farm” on that vehicle.
So, I’m reminded that: 1) since A.D. 1971, gold has outperformed the Dow by almost 50 times; 2) it appears that gold will continue to outperform the Dow for at least another 5 years; and 3) I’m inclined to play to win rather than play to not lose. Given these premises, I’m led to a conclusion that’s not conventional wisdom, but still seems logical: forget stocks and bonds that are virtually certain to lose value, and invest exclusively in gold. (If I felt compelled to “diversify” I might also invest in silver and perhaps even platinum.)
Investment is crucial in an era marked by inflation. Why? Because the only alternative to investing is saving. If you are saving your wealth in the form fiat dollars during an era of inflation, your dollars are growing less valuable every day. Therefore, sensible people invest their fast-inflating dollars in some other form that can at least preserve their wealth against inflation. Diversification is fairly good advice in a time of inflation—so long as you don’t invest in vehicles that can’t keep up with inflation. And what investment has done—and should continue to do—as well at keeping up with and even outperforming inflation, than gold? In time of inflation, you want an investment that’s “inflation-proof”. What fills that bill better than gold?
• If it’s crucial to invest (rather than simply save fiat dollars) in an era of inflation, it’s critical to invest in an era of hyperinflation.
The International Accounting Standards Board defines hyperinflation, in part, as: a cumulative inflation rate over three years of at least 100%. Thus, if we saw an annual inflation rate of 25% or more that compounded for 3 years, we’d be in an era of hyperinflation.
Under hyperinflation, half of our retiree’s $200,000 would be “disappeared” just 3 years. Even if inflation later returned to “typical” levels, instead of lasting for 30 years, his $200,000 “nest egg” could be gone in 10 or less—leaving him to survive on only Social Security (also badly diminished by inflation and hyperinflation) for the remainder of his life.
Is hyperinflation possible? John Williams (shadowstats.com) says it’s almost certain:
“No More Kicking the Can Down the Proverbial Road. . . . A hyperinflationary great depression should be in the works by the end of 2014. . . . the U.S. dollar is not likely to survive until the next congressional election in 2014. The circumstance now for the U.S. government simply is to do or die.
“To prevent the existing broad loss of global market confidence in the U.S. dollar from evolving into a hyperinflationary collapse of the U.S. currency, the federal budget needs to be balanced, not just in terms of the cash-based and gimmicked deficit reporting that showed a $1.1 trillion annual deficit in 2012, but also, more importantly, in terms of Generally Accepted Accounting Practices (GAAP) accounting that likely showed a $7.0-plus trillion annual deficit in 2012.”
In other words, government claims to be working mightily on the fiscal cliff to close $600 billion of the reported $1.1 trillion annual deficit—but the annual deficit is actually about $7 trillion. If the annual budget deficit must be reduced to avoid another economic depression, what are our prospects for success if government is only tinkering with $1.1 trillion when the real annual deficit is $7 trillion?
A: Just about zee-row. Maybe less.
Williams agrees:
“The odds of the outgoing or the incoming Congress taking the actions necessary to bring the U.S. fiscal system into balance are nil. . . . There are simply not enough taxes that can be raised, or enough spending that can be cut, that would balance the actual, GAAP-based [$7 trillion] budget numbers.
“Also, in a structurally impaired economy, there is no chance of generating enough new economic activity to grow out of the deficit.”
Williams implies that there’s no way out. If government raises taxes, the economy will slow. If government cuts spending, the economy will slow. If government does nothing, the world’s creditors will lose confidence in the dollar and refuse to lend more currency to the US government except at exorbitant rates of interest—and the economy will slow. If the economy slows much more than it has, we will probably slide into a depression.
Until we abandon fiat currency or the government dies, government will rob its creditors by inflating the dollar so as “pay” the national debt with cheaper dollars. Thus, the only things we can count on are a slowing economy and rising inflation.
This tells us that an economic depression is virtually inevitable and will be accompanied by inflation or hyperinflation. That’s the worst of all possible economic scenarios: employment and earnings will be falling while prices are rising.
This trauma will be particularly acute for retirees who can’t even get another job at the same time the purchasing power of their savings and Social Security is being eroded by inflation.
There’ll be no painless solution to this problem. However, one remedy may mitigate the pain. That remedy is implied by the fact that since A.D. 1971 the Dow Jones rose 13 times and the price of gold rose 49 times. Where should you have placed your savings? The Dow or gold? The answer’s obvious.
I know of no reason why the next 5 or 10 years shouldn’t emulate the past 40. I know of no reason to suppose that gold will not continue to dramatically outperform the stock market.
I conclude that anyone who wants his retirement to be his “golden years” had better start converting his paper savings into gold.
