Why wonít government, financial firms and media tell the truth?


Henry K. (Bud) Hebeler



The government, financial firms and financial media are walking in lock-step to the tune of recovery will be just around the corner.† Well, it canít possibly be.† Letís first look at why recovery will be very long.† Then weíll review the ostrich head-in-the-sand material given to the general public.


The reason that there will be no quick recovery is the conjunction of three inescapable facts:† (1) People have saved very little for two decades, (2) pension plans are being replaced by savings plans, and (3) our population is aging.


There are three distinct savings patterns if you look at the history of savings.† The first was in World War II when savings exceeded 20% of disposable income.† Why?† Because there was nothing to buy and we had full employment.† Food, goods, gasoline, etc. were rationed and many things not available at all.† Housewives were employed in the defense industry.† Think Rosie the riveter.† Their husbands were in the military.


The majority of post World War II history saw savings averaging about 9% of disposable income.† That level held until 1985 when consumerism started to raise its ugly head.† Everyone had to emulate the Jones:† bigger homes, modern appliances, bigger TVs, computers, cell phones, cars with more features, etc.† Add the pressure of kids to have cars of their own, music in their ears, gaming at their finger tips, cell phone texting, and so on.† In the twenty years following 1985 the savings rate plummeted to virtually zero and has hung there ever since.


In my book, Getting Started in a Financially Secure Retirement (Wiley, 2007), I showed how it would take savings rates of over 20% in the next twenty years just to recoup the lost savings of the previous twenty years.† That means that we would have to live under the same spending limitations as in World War II!


But that understates the required savings.† Thatís because in the past twenty years employers started switching out of defined benefit plans with a lifetime pension as the prize.† They substituted 401(k)s and cash-balance plans which require that employees save on their own.† Theoretically employees could convert the savings into an immediate annuity at retirement which would make about the same lifetime payments as the pension--IF they made maximum savings contributions, which is far from actuality.


There are exceptions to the above plight.† Those are government employees.† They not only got to add a savings plan but also kept their pensions.† These are rich benefits even when compared to those firms that still pay pensions.† Most government pensions start at values comparable to non-public pensions but they have incredible extra benefits that non-public pensions donít have.† Most have cost-of-living-adjustments (COLAs).† These COLAs can easily double the payments by the end of retirement.† Also government pensions are protected by the power to tax.† Private pensions are not.† Add government retirement health insurance benefits that canít be matched in private industry.


The theory that the general public would replace pensions with savings fell apart because people fell far short of maximizing savings contributions, or, if individuals did, they accumulated debts in unbelievable amounts with large mortgages, home equity loans, automobile loans, deferred payment contracts and credit cards.† Their debts both ate up the rest of their savings capabilities and offset the savings they had already accumulated.


All of this spending made industry boom and stock brokers thrive.† At the same time, financial firms found a new tool to capitalize on the debt side.† Almost as soon as someone signed up for a loan, the loan was packaged with other loans and sold to another financial firm.† Then the financial firms started to speculate on these packages by insuring the packages for far more than they were worth.† These ďinsuredĒ packages were sold again, and again, and again.† Hedge funds made side bets on these using even more borrowed money to leverage the investments.† Of course, this was destined to crumble, and fall it did!


But thereís another blow coming to the economy.† Thatís the aging of our population.† More than 60 million people will want to retire in the next twenty years, an amount that exceeds anything weíve ever seen.† Most will get to retirement age, see they have too little savings and no pension.† At the very least, they will have to work part time to supplement their Social Security which is on shaky legs by itself.† Not only that, but older people have much larger medical costs, particularly as they ageówhich compounds the costs because people are living longer.† Medicare canít possibly cover all of their needs, so their care will have to be rationed and draw from the little savings they have.


So think what must have to happen to the economy when older people donít have money to spend and younger people have wakened to the need to save more, a LOT more.† Consumerism is dead along with most of the industry that supported it.† Those trying to get money out of their McMansions will have great difficulty because large homes will face much more selling competition, and smaller homes will be bid up thereby reducing the net cash gain from downsizing.


Financial firms have hidden these facts and inevitable scenario from the public to get their money while things are hot.† The government doesnít want this message out because reduced consumption means lower tax receipts and even higher national debt.† In times past, when questioned about the problems from low savings, we heard all kinds of reasons why saving more was not important.† Remember the argument that investment values have grown so much that people donít have to save any more?† Or how about the excuse that people would be able to retire on their home equity?† More blatant were those who said we would all inherit incredible sums as if we were Bill Gates descendants.† Then there were those who claimed the savings statistics missed certain elements even though the Bureau of Economic Analysis said these claims were not true.


Now we have a government Hell bent on trying to spend more itself and to get the people to spend more.† Our national debt and unfunded Social Security and Medicare shortly will approach $200,000 for every man, woman and child in the U.S.† That doesnít count the State obligations nor our own private debts for mortgages, cars, credit cards, etc.† We have already dug ourselves a hole from which it is impossible to recover.† Now the solution is to dig it deeper?† Come on!† Whoís going to pay for all of this?† The rich canít possibly come up with that kind of money.† No, it will take the accumulated income and other tax collections for several generations as well as the government printing press.


The ultimate solution from a politicianís (or government employee with a COLA) point of view is take more from the rich and to print more money. †Taking more from the rich will not provide sufficient funds, so printing more money is necessary. †Printing money brings inflation, and sufficient inflation makes it unnecessary to pay off the national debt.† Inflation is great for the government but extraordinarily painful for retirees on a fixed income.† It also reduces the real value of savings already accumulated as well as the real return on those savings.


So why are we so gullible?† We like to vote our pocketbooks.† Hence politicians make promises they know they either canít keep or know will be very painful after they end their term in office.† Public employees that face elections are no different than any of the rest of us.† They donít want to lose their jobs.† So they say what we want them to say.† Our lack of insight into economics and future implications blind us to the inevitable burdens we, our children and future generations will bear.


Some individuals will survive the future times in reasonable comfort.† These are those who save a large part of their income, invest in things that will survive a collapsing economy and high inflation, and pay attention to tax vulnerabilities.† Of course there are also those who have a cushy job with the government.† After all, the government benefits are unsurpassed, and government is a growth industry with unlikely layoffs.