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After We Lose Our Homes, Is Our Retirement Next? |
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Over the past months and even years, policymakers have been puzzling about where the American consumer was getting the cash to keep spending. Surely home equity and credit cards had to be tapped by now. So where is the money coming from?
Now we know.
A monthly survey of CEOs for the first time asked chief financial officers in November if they’ve seen “an increase in the number of employees taking loans or making hardship withdrawals from their 401(k) accounts?”
A total of 18.5 percent said they had, with the most-cited reason being the need to make mortgage payments.
Some economists are predicting the next economic crisis will center on consumer credit card debt—and many of us think that crisis already is well under way. But if borrowing from our retirement future becomes a trend, the long-term ramifications of the current economic mess won’t be felt for years or even decades.
Throughout these seven years of the Bush administration, the middle class increasingly has been hard hit, with more of us needing to borrow just to get by, especially if we have to pay for health care or education for our kids. A Federal Reserve report yesterday showed just how tapped out we are when it comes to taking cash out of our homes:
The amount of equity that U.S. homeowners hold in their homes slipped in the third quarter to the lowest level on record, just above 50 percent.
Tanking equity in our homes is compounded by skyrocketing debt on our credit cards: Between 1989 and 2006, Americans’ overall credit card debt grew by 315 percent from $211 billion to $876 billion (2006 dollars), according to a recent report by Demos. The nonpartisan think tank also found that in 2004, the average credit card-indebted family allocated 21 percent of its income to servicing monthly debt compared to the 13 percent dedicated to debt payments among all households.
We released a strong set of recommendations yesterday for addressing the nation’s subprime mortgage crisis, first and foremost, calling for an immediate moratorium on home foreclosures and a restructuring of all—not just some—subprime loans at the low 30-year teaser rate.
In the spirit of the traditional media, which always sees a silver lining in every economic cloud, we’ll end with a plug for a great video clip, “Fight the War on Greed,” by our friends at Brave New Films. The clip highlights Henry Kravis, a founding partner in the private equity firm KKR, who circulates among his five mansions and makes $450 million—$51,369 per hour, 24 hours a day. He has enough loose cash to spend $7 million upgrading one of his horse stables. Plus, he pays a lower marginal income tax rate on his carried interest income than his maid. See, the economy is working. (Just not for us.)
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Listen to the Republican Presidential candidates, they say their #1 objective is to address Social Security and Medicare. This from the anti people party that has been spending and spending and spending us into overwhelming debt over the past 7 years. Their solution, screw the people again by reducing important entitlements. I say, raise taxes on the very, very rich, pay back the stolen money from the Social Security Trust Fund and cut the military budget. That would help us to get back to balance the Federal budget and to provide needed services to American families. Any working person who votes Republican is voting against himself!
Ensuring a Secure and Dignified Retirement
The U.S. government has spent every penny of the money they were supposed to have set aside for your retirement. Beyond that, they have imposed a hidden 35% tax on the earnings from the money you have saved for your own retirement.
Without drastic tax increases and benefit cuts or economic growth at a rate that has not been seen since World War II, the federal government predicts that the cost of current retirement and health care benefits for our aging population will exceed tax revenues as early as 2017. But the U.S. tax system effectively discourages working Americans from saving for college and retirement, and takes away 35% of retirement earnings from stock investments, making Americans even more reliant upon social safety nets that are not safe.
According to a Congressional Research Service report on Social Security reform:
“The worker to recipient ratio is nearly fixed, barring massive immigration or higher birth or death rates. Only the future size of the economy and the future state of government finances can be influenced today. Thus, reform can ease the future financing burden only if reform causes the economy to grow faster and improves the government’s finances. ”
In other words, tweaks to the Social Security system will not make the safety net reliable. There is no real money in the Social Security trust fund. The government has “borrowed” it all and spent it on other things. When the government refers to the “deficit”, the number they are referring to is the cash shortfall after having spent every penny in the theoretical “trust fund”. To pay future Social Security and Medicare benefits, future workers will need to provide fresh tax revenues. But because the number of retirees is rising relative to the number of workers, future workers will not be able to pay those taxes without a substantial decrease in their standard of living. Medicare and Social Security will collapse unless we significantly increase the growth rate of our economy, slash benefits to the bone, or tax workers unmercifully.
The government has not saved for your retirement, it has merely made promises backed only by a mortgage on the futures of workers who may not be able to pay. The Shared Economic Growth proposal, explained at www.sharedeconomicgrowth.org , would provide the means to boost the growth of our economy in time to deal with this looming crisis. By providing strong financial incentives to move profitable activities to the United States and by significantly increasing the efficiency and fairness of our economy, it can bring our economy back to the state of health it was in 35 years ago.
Further, by increasing by up to 54% the returns that workers would earn on their IRAs and on other pension savings accounts, Shared Economic Growth would provide individuals more incentive to save and faster growth on their savings. At a 5% after-tax rate of return on savings, it takes roughly 15½ years for one dollar to double. Boost that rate of return by 54%, and that same dollar will double in 10½ years. That increase would greatly boost the financial independence of working Americans, helping them to avoid dependence on the Federal government, without implementing any hokey schemes to shift money out of Social Security and into private investment accounts. Some 27% of U.S. corporate shares are held by public and private pension funds. Removing the hidden 35% tax on the earnings of these funds would make a huge difference in people’s retirement savings. Since the government has spent all of the money that it was supposed to save for your retirement, the least it can do is to let you keep the earnings on the pension money you save yourself.
A person who works hard all her life deserves a secure and dignified retirement, free of financial worries. Shared Economic Growth would address the Social Security problem on two fronts. By boosting the U.S. economy overall, the proposal would provide the revenue base the U.S. government needs to keep its promises. By boosting private savings, Shared Economic Growth would provide individuals with the means to ensure their own security without having to entrust that responsibility to the government. It provides the best hope for a safe retirement.
Wouldn’t that make you feel more secure?
You can help to make this a reality. Visit www.sharedeconomicgrowth.org to see how.