Is there a way out of this economic mess?


Henry K. Hebeler



The current economic mess:




“Households have used 30% or more of their available credit –considered a risky percentage by the industry– has risen to more than one-quarter of all card users.

Average revolving balance is $9,890, up from  $8,069 just four years ago.

US households now hold an average of 2.8 cards—compared with 2.4 cards four years ago.”  Bottom Line Personal, Feb. 1, 2008, p. 15.


“The past 10 years will go down as one of the greatest consumer-lending sprees ever.  Adjusted for inflation, consumer debt – including mortgages – rose an average 7.5% per year since 1997, far faster than the 4.2% rate of the previous 10 years. . . If Americans had kept borrowing at the pre-1997 pace, they would have had about $3 trillion less in debt.”  Business Week, 2/4/08,  p. 27.


“the average debt-to-income ratio for middle-class Americans now stands at 141%, double what it was in 1983. . . the U.S. hasn’t faced a credit crunch like this in 25 years.”  Business Week, 2/18/08, p. 34, 36.


“Eighteen percent of workers had a loan outstanding from their retirement plan in 2007, up from 11% in 2006….[T]he average unpaid balance at the end of 2006 was $7,300 according to  the Employee Benefit Research Institute.”  Wall Street Journal, 2/18/08, p. D1.


Surprise retirement costs


“Caring for parents can cost children: …People who don’t prepare to care for their sick and aging parents could fall victim to what economists call “negative inheritance.”.. It is when costs to children caring for their relatives outstrip any gifts or bequests they might receive in return.”  Wall Street Journal, Personal Finance: “When Inheritance is Negative.”


Public employees enjoy security at our costs.


“Public jobs see pay gains. ..State and local government workers now earn an average of $39.50 per hour in total compensation …Private workers earn an average of $26.09 an hour. . . From 2000 to 2007, public employees enjoyed a 16% increase in compensation after adjusting for inflation compared to 11% for private workers. . . The nation has 20 million state and local government employees [+ 2.7 million federal workers not including the military or supporting contractors].  About 116 million people work in the private sector.”  USA Today, 2/1/08, p. 1.


“public pension funds have $3 trillion in assets but unfunded liabilities of $440 billion…An economic slowdown would only aggravate the situation for many funds…” Wall Street Journal, 2-28-08, p. C1.



Medical costs increase naturally as we age—but so does the unit cost.


“The survey of 1,000 Americans over the age of 65, conducted for Medco by Directive Analytics, found that one in three retirees say medical and drug costs far outpaced expectations. Results also showed that one in four retirees spend 10% or more of their monthly retirement income on medications alone.”  Reported 2/13/08 on




“Eliminating the 75-year Medicare deficit would require an immediate 122% increase in the 2.9% Medicare payroll tax, a 51% cut in benefits, or a combination of the two.”

American Academy of Actuaries quote from USA Today 1/17/08, p. 3B.


“Daunting future for Medicare.  Spending will soar from 3% of gross domestic product now to 8% of GDP in 2040, according to Boston College’s Center for Retirement Research.  By 2040, income tax rates will need to rise by 20% to cover the government’s Medicare costs, and out-of-pocket costs will devour more than half of the average Social Security benefit.”  Kiplinger’s Retirement Report, January 2008, p. 9.


“If today’s tax rates remain in place, 76% of all federal income tax revenue in 2050 [vs. 8.6% in 2010] will be soaked up by [Social Security and Medicare] –before a penny is spent on defense, national parks, health care for the poor or haircuts for congressmen.”  Money, 3/08, p. 88.


“Senior benefits costs up 24% [above inflation in last 8 years.]  The average Social Security benefit per senior in 2007 was $13,184…The [total] cost of government benefits for seniors soared to a record $27,289 per senior in 2007, according to a USA TODAY analysis.”     USA Today 2/14/08, p. 1.




“If you start measuring inflation after the Great Depression, inflation has been 4%, not 3%.  Long periods of recent history had over 6% inflation.  My father retired in 1965.  He lived to 96.  During those years his purchasing power declined 80%!  In the first ten years of my own retirement, my fixed pension lost 30% of its purchasing power--and that was in a time of supposedly low inflation.”  Inflation Can Destroy Retirement,, Helpful Articles by Henry K. Hebeler.


Retirees inflation greater than the CPI


“By 2017, total health care costs will double to more than $4 trillion a year, accounting for one of every $5 the nation spends…The 6.7 percent annual increase in spending – nearly three times the rate of inflation – will be largely driven by higher prices and an increased demand….That [$4.3 trillion] would be about 20 percent of the U.S. gross domestic product….In 2006, people and the government spent …an average of $7,026 a person.  In 2017, health care spending will cost an estimated $13,101 a person.”  Seattle Times, 2/26/08, p. A4, referencing report from Centers for Medicare and Medicaid Services.






“Corporate Earnings.  Yes, there’s been a profit boom in recent years….But here’s an unfortunate truth – the profit surge has been mainly in one area, financial services.  Financial institutions have benefits from the consumer credit boom, the proliferation of new financial instruments, and relatively low rates.  By contrast, the earnings of nonfinancial companies over the past decade have averaged …about the same since the mid-1980’s.”  Business Week, 2/4/08, p. 27.


“In 2003, 10 big Wall Street firms paid $1.4 billion in fines and penalties to settle civil charges by securities regulators that they issued overly optimistic stock research to win investment-banking business from companies they were supposed to analyze separately.”  WSJ, 2/16/08, p. B1.


Your home as an investment


“As baby boomers retire, home markets will hurt. . .The math is simple:  79 million boomers have driven up housing demand.  That trend will reverse itself when boomers are age 65 to 75;  there will be three sellers for each buyer.”  Dowel Myers, Prof. of policy, planning and development, USC.  USA Today, 1/16/08, p. B1.


Count on energy problems


“Our energy problems will not go away—at least in our lifetimes.  Our dependence on foreign oil is too great and our political process too weak to permit mobilizing solutions. It is virtually impossible to develop domestic oil fields, increase refineries, build dams, construct power plants, lay pipelines, string high power lines, open coalmines, dispose of urianium, and the like.


“Industrial and commercial growth has always demanded more energy.  We have seen it here, and we are starting to see it in developing countries.  China by itself is going to be a massive user of energy—even bigger than the United States.  India is going to add to the problems.”  Getting Started In A Financially Secure Retirement, Wiley & Sons, 2007.


The average person can’t recover.


It’s important to understand the history of national savings rate, that is, the percent of disposable income (gross income less income tax).  During the Great Depression, savings rates were about 4% and dipped below zero for only two years.  The Great Depression was followed by World War II.  During the war, the national savings rate was its highest value ever averaging about 25%.  After World War II and until 1985, the national savings rate was generally between 8% and 10%.  The exceptions were the couple of years immediately after the war when the savings rate was only about 5% to 7%.  That was when people once again had an opportunity to buy automobiles and previously rationed items.  Still, the savings rate was not negative, and debt was a bad word.


The fuse to our financial disaster was lit about 1985 when national savings rates started an abrupt decline until savings became virtually non existent from 2005 on. Consumption increased at a mad pace as men, women and children raced to get the latest electronics, large houses and vacation expenses far beyond their means.  Debts increased as well as people stretched to borrow on the remaining assets to be like their friends and the “Jones” across the street.  Grade school kids had to have cell phones.  High school kids had to have cars.  Mom and Dad had to have a bigger TV and cable connection to the internet.


“The financial industry, intent on keeping an image of ever upward growth, makes one excuse after another to minimize the importance of national savings. At one time, financial “experts” said people didn’t have to save because they were going to inherit so much.  When the stock market was booming in the late nineties, these same experts said people don’t have to save because what they have already saved had grown so much.  Then the next excuse was that people have made tremendous savings from the growth of their home equity.  After watching all of these theories fall apart, these experts must have crawled into the woodwork, because their silence is deafening after the tide has turned in each instance.


“So, how much would people have to save in the future to make up for lost savings over the past 20 years?   To get this answer, we have to calculate what they would have accumulated with 9% savings over both the past 20 years plus the number of years ahead when they will retire.


“Let’s first assume that they have 20 years ahead to save.  Over the past 20 years plus the future 20, they would have accumulated what amounts to 10.9 times the final year’s after-tax wages—if they could get a consistent return as high as 8% in a deferred-tax account and preserve 3% wage growth over the entire period. (10.9 times final wages might finance a retirement income of 40% to 50% of working wages.)  In order to get 10.9 times final wages using the actual past 20 year’s savings rates, they would have to save almost 21% of their disposable income for the next 20 years.  Starting now!


“Can you imagine the difficulty of getting the national savings rate to 21%?  The only time it has been that high since the Great Depression was during World War II when virtually all people, wives included, were working and there was nothing to buy.  Industry was focused on weapons production, not goods for civilians.  Further, almost everything was rationed.  It was politically correct for everyone, including school children, to invest in savings bonds.  It took that kind of environment to achieve such high savings rates, all in spite of the highest income tax rates we’ve ever had.”  Quotes above are from from the Economics page of Helpful articles.


In fact saving 25% of disposable income took more than war conditions.  It took a nation that had just come out of the Great Depression where people were conditioned to a harder life.  Most people had very little.  There were no television promotions of a more desirable lifestyle or media advertisements for innumerable pieces of intriguing electronics.  Further the nation had a cause: the possibility of being overrun by aggressors just as was happening in Europe.  People were patriotic and united.


One would think that people would be saving more as employers abandoned pensions in favor of savings plans.  For the most part, the government jobs are the ones that still have both pensions and savings plans.  Not only that, but most of the government pensions have cost-of-living adjustments, COLAs.  These are very rich pensions indeed—usually supported by strong government unions.  Together they form an extraordinarily powerful voting block that will surely not support a reduction in their jobs (many with tenure), compensation or benefits.


With almost one out of every five people working for the government, four out of five must pay for their support—adding to the problem.  This ratio will rapidly deteriorate as the working population decreases when the baby boomers retire and the size of government continues to increase, both in ratio and in absolute numbers.  Remember, too, that the government sector has wage and benefit levels about half again higher than private sector employment.


The way out of this economic mess:


We won’t be able to solve the nation’s problems, but we in the private sector can do something as individuals to help ourselves.


“Forgo the Joneses’ lifestyle,


Make conservative plans,


Preserve some funds as reserves for unknowns,


Shift to fixed income investments [as we age],


Ladder immediate annuities late in life,


Repeat planning process every year.”


Points are from “Getting Started in a Financial Secure Retirement,” Wiley & Sons, 2007.


Actions like these will make what is inevitably an unbearable situation for the average person in the private sector to something that’s tolerable for those who save, invest conservatively, and plan for a difficult economy.  This is much of the theme in the Web site,


The final point is the often cited 1787 quote supposedly from Alexander Tyler, a Scottish history professor at the University of  Edinburgh.  There is no evidence of this being an actual quote, but the thought is something to consider.


“A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury.  From that moment on, the majority always vote for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy.”


I hope that this is not the final outcome of our future years, but the alternative outcome often cited seems quite unlikely.  That alternative outcome is a booming economy with relentless consumerism that provides enough money to support our government’s largess, thriving business and retirees without savings.  This dream will fade as the majority of baby boomers count on Social Security as their primary retirement resource and a financially failing Medicare for their health needs.  All this while the private sector work force reduces and tries to bear ever increasing government costs.





Note:  Many of the things above are covered in more detail in “Getting Started In A Financially Secure Retirement,” Wiley & Sons, 2007, as well as in the Helpful Articles section of