Retirement Nightmare

It is widely known that Americans on average have saved very little, and in many cases actually nothing, for their retirement. Here are a few examples of studies looking at retirement savings:  one recent study found that 50% of US citizens have saved precisely zero for their retirement. We quote:


“The youngest and the poorest are the least likely to be putting money aside. Fifty-six percent of all 18- to 34-year-olds are not saving at all for retirement, according to the study. In addition, just 23 percent of Americans earning less than $50,000 per year contributed at least $2,500 to their retirement accounts over the past year.


At the same time, many younger Americans simply cannot afford to start saving for retirement. Just one in two recent college graduates have full-time jobs, according to a study by Rutgers released on Thursday. And the average debt burden of twenty-somethings is $45,000, according to a recent study by PNC Bank.

That financial insecurity lasts throughout the lives of many. Forty-three percent of all American households are one crisis away from poverty, according to a recent study — meaning saving for retirement is all but impossible.


It is of course not particularly surprising that the poorest strata of society are the ones that find it nigh impossible to accumulate savings: they are the main victims of the incessant monetary inflation practiced in the modern-day fiat money regime (it is therefore rather mystifying that it is the political left that is usually most vocal in pleading for more inflation by the Fed; this can probably be ascribed to economic ignorance). These are the people who are the last to receive newly created money (if they receive it at all), by which time prices have already been bid up. They cannot profit from asset inflation, as they don't own any assets to begin with. As a result, they keep losing ground in real terms. In fact, it is a good bet that the percentage of the population that actually profits from inflation is exceedingly small – likely no more than 5% to 10%. Ironically it is also the group that needs these profits the least, since it is already the richest stratum of society.

Another study notes:


“A new report paints a rather grim assessment of how prepared we are for retirement. "The Retirement Savings Crisis: Is it Worse Than We Think?" from the Washington, D.C.-based National Institute on Retirement Security, says the typical American family has only "a few thousand dollars" saved for retirement.

"We have millions of Americans who have nothing saved for retirement," says Diane Oakley, executive director of the NIRS. "We have 38 million working-age households who do not have any retirement assets."

For people 10 years away from retirement, the median savings is $12,000. "Of the people between 55 and 64, one third haven't saved anything for retirement," Oakley says.


Bankrate conducts a regular survey asking Americans about their personal 'financial security', and its results are not particularly encouraging either. The financial security index is just about at the 100 level which is the demarcation between declining and increasing financial security:



Aug2013FinSecIndexBankrate's financial security index is declining again after briefly popping above the 100 level for a few months this year – via Bankrate.



We know of course that this sorry state of affairs is not exactly big news. The reason why we mention it is because it is such a contrast to what other statistics claim about the wealth of the citizenry and the economy's ability to produce wealth.


Orwellian Statistics

Even while the above plays out and many observers note that the government's unfunded liabilities are somewhere in the stratosphere, which means that people without savings will have to rely on a social security system that may become insolvent in a not too distant future, the government regularly reports that things are not just perfectly fine, but getting better.

It does so by regularly altering the statistics it publishes, allegedly to add to their precision. According to these 'more precise' statistics, there haven't been any noteworthy price increases for decades, in spite of the money supply growing by more than 1,000% over the past 30 years, and data describing economic output are continually altered to show how everything is getting better and better by putting a monetary value on things that actually have no market price. There are for instance 'imputations': as an example, banks charge no fees for checking accounts in order to attract customers. These fees that are not charged, are then added to 'income' by the government, by assigning an imaginary dollar value to them.

When the government recently altered GDP calculations, which resulted in the addition of the economic output of all of Belgium to US GDP, it started counting a number of intangibles as well. Some of these additions to output are truly absurd. For instance, pensions that companies are promising to pay in the future are now added to GDP. No-one knows if they will ever be paid of course, since companies can go bankrupt, can alter their pension plans, and are in any event lugging grievously underfunded pension plans around (estimates vary, but all the numbers are in the trillions). A recent study found that in spite of the stock market rally, the underfunding problem has grown; the plans of S&P 500 companies alone  are underfunded by nearly $1.6 trillion:


“The cumulative liability among defined benefit pension plans sponsored by companies in the benchmark Standard and Poor's 500 index increased to $1.56 trillion in 2012 from $1.38 trillion the year before, outpacing the growth in assets.”


Moreover, what value to put on these promised future payments is attended by considerably uncertainty, as it is unknowable what the purchasing power of money will be at these future dates. Recall that the US money supply has grown by more than 230% since the year 2000 alone. The full impact on money's purchasing power very likely has yet to arrive.

We should note here that it is certainly true that 'R&D' has value (another item that is now added to GDP). An argument can certainly be made that intangible capital adds considerably to long term economic growth. Unless protected by patents, knowledge is a non-rivalrous good: it is free, like the air we breathe. And yet, its application in production processes can serve to increase output in the long run. In a way this is similar to the effect described by Hayek, who noted that investments in certain stages of the capital structure can also affect the returns in stages of the capital structure that produce complementary goods. What is however crazy is the idea that any of this can be measured.

In fact, it seems to make no sense to add it to those things for which money prices are paid, and simply making up imaginary dollar values to do so. Not to mention the fact that what precisely is added in terms of imputations, R&D, or whatever other intangibles the government's statisticians have identified as worthy for inclusion, is completely arbitrary. The money prices that are paid for the products that have been produced with the help of both tangible and intangible capital already fully reflect the value buyers put on such goods or services. Why should additional numbers be made up out of whole cloth and be added on top?

When the government calculates the IT spending to be added to GDP, it employs hedonic indexing to determine the 'real' value of such spending. The result are imaginary numbers of stunning proportions. We illustrated the effect with an example in a previous post on the Reinhart-Rogoff study, in which we discussed in more detail what a nonsensical number GDP generally is. Let us quote the example again:


“In Q2 of 2003, actual spending on computers increased by $6.3 billion, from $$76.3 billion to $82.6 billion. If simply 'every monetary transaction' were added to GDP, then this is the number that would have been added, and thereafter it would have been massaged by the 'deflator'. If not for hedonic indexing, that is. Before we tell you, try to guess how big an increase in spending on computers the government actually added to GDP in this instance. Was it 20% larger? 30%? Maybe even 50%? Hold on to your hat.

The number added by government to GDP instead of the $6.3 billion in actual additional spending was $38.2 billion. In other words, almost $32 billion in completely imaginary money that no-one ever spent or received, with the total number used by the government amounting to more than 6 times the actual spending growth was used for the calculation of 'real GDP'. It should probably be renamed 'unreal GDP'.

One could easily throw a 'growth' party with such methods in the middle of a depression.”


(emphasis added)

To some extent we can even understand the argument for hedonic indexing, which attempts to put a value on quality changes. But what these arithmetic acrobatics ultimately demonstrate is the complete futility of trying to generate meaningful aggregate economic statistics.


Giant Overnight Imaginary Wealth Creation

We have now learned that the government has decided that US citizens have actually become wealthier by $3 trillion overnight. Don't try to spend all that new-found wealth all at once though, unless you can find someone who accepts imaginary dollars for real goods. That is what you would have to accomplish if you wanted to actually spend it.

Via Zerohedge:


“As today's release of the Fed's very much revised Flow of Funds report confirmed, US households as of this moment are wealthier by over $3 trillion, just because the re-definition of the Pension Fund line item, which is no longer counted as "Reserves" but the broader "Entitlements."

End result: whereas Americans last quarter had net worth of $70.3 trillion, as a result of this revision, they now have $73.5 trillion. Revisionist Definition wealth for everyone!”


Apparently this addition of $3 trillion in imaginary wealth is a follow-on effect of the above discussed inclusion of the value of pension promises in GDP. The result is that the leverage of households now looks far smaller than it actually is.

Readers may have noticed that there has never been a change in definitions or statistical methodologies that is making things look worse. For instance, improvements in quality are counted – declines in quality never are. The effect of monetary inflation on prices has been defined away with so many tricks, that the measurement has become utterly meaningless for the vast bulk of the population (the price effects of inflation are different for different strata of society, depending on what goods they mainly spend their money). If the government were still using the same methodology to calculate 'consumer price inflation' it employed in the early 1980s, economists would now be discussing why we are in stagflation.

And so it is not surprising that mere promises are suddenly regarded as actual wealth. The only problem is that this wealth does in fact not exist. This brings us back to the retirement savings problem discussed above. The problem with the aggregate of household assets and liabilities the Fed publishes is precisely that it is an aggregate – it contains the assets of the top few percent of the population that own the bulk of he wealth (and can thank the Fed profusely for helping it to attain this exalted position with its policy of constant inflation – which in yet another Orwellian twist has been misnamed the 'price stability policy').

For the remaining population this statistic is completely meaningless. It's only purpose as far as we can tell is to make the government's economic policies look better. We suspect that is the purpose of most of these statistical mirages that have been created over the years.





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5 Responses to “The Accumulation of Phantom Wealth”

  • Bogwood:

    The whole idea of retirement was an illusion created in an era of cheap energy/resources which is now in the rear view mirror. The real concern is disability, how to plan for it, how to define it. National programs are probably inadequate. In one program you have to be disabled to get a job,in the other you have to be disabled to get benefits without working. Only your family,friends and neighbors will judge your disability accurately. The young adults should forget retirement but consider their disability options. The options will be more local, fairer but still a little element of red tooth, red claw.

  • Mark Humphrey:

    I like this blog and read it nearly every day.

    But your statement above, “Unless protected by patents, knowledge is a non-rivalrous good: it is free, like the air we breathe.” won’t hold water. On what basis you conclude that knowlege is free or “non-rivalrous” mystifies me. Real knowlege isn’t free, a condition of nature, like air or sunshine. It is scarce and today, rare even.

    What does rivalry have to do with knowlege, or with private property, for that matter? The purpose of property is to demarcate the works of morally sovereign individuals, so that the productive can enjoy and keep what they’ve earned.

    Of course, if one views this issue from a Misian perspective, in which values are subjective and people are utility maximizers, incapable of distinguishing between truth and falsehood, between good and bad, then property exists only to prevent rivalries from getting out of hand. So from this perspective, one thought or idea is the same as another thought, since they’re all expressions of subjective utility of the subject. From this perspective, there’s no free will, since people are automans who are locked into their subjective world views. Finally, from this view, knowlege is non-absolute, because the idweas people choose to hold as “knowlege” simply satisfy subjective longings.

    Given Mises’ subjectivism, of course, knowlege is not objective and ideas are interchangeable. Interchangeable subjective ideas are “free”–a condition of human nature.

    I won’t try to persuade anyone that this view is wrong. But I’m guessing that this view gives energy to the idea that ideas are “non-rivalrous”. Whatever the imagined relevance of this imaginary concept to reality, the fact remains that good ideas are scarce and valuable. Copyrights and patents simply uphold imperfectly the rights of writers and inventors to prevent unauthorized knockoffs by buyers of their PHYSICAL CREATIONS (written poems and stories, etc; mechanical devices and biological innovations, etc.).

  • Thomson Hankey:

    The entire concept of wealth for an entire society measured in USD – or in any other currency – is an artifact. It just represents from an accounting standpoint the current valuation of the stock of real estate, equities, bonds and so forth and actually, the higher the stock of wealth to the flow of income (GDI), the poorer society is. Let’s consider a society where the the valuation of all assets is equal to the total yearly income and a society where it is ten times (which is roughly where most current national systems are trending). Which society is richer? Of course the latter one, as people can afford much more real estate and own much more units of stocks and bonds from which they derive more yield (income) by virtue of the lower valuations. Thus, what is true for an individual or for a group of people (a higher wealth to income ratio is better), is not true for society as a whole (it just means that the valuation of assets is high compared to income i.e. that the purchasing power is low).

    • JasonEmery:

      Agreed, Hank. Another point is that it is almost impossible for a vast nation state to save for the future!! Certainly an individual can do so, and maybe even a small country, the size of Panama. Individuals and the Panamanian Nation can work hard and generate wealth, and then trade that wealth for things, like dollars, gold, stocks, bonds, etc. all without pushing the price up against themselves in the purchasing process.

      But when a country reaches the size of the USA, relative to the entire World’s economy, (25%), it is impossible to buy anything in size without pushing up the price to the stratosphere. This limits the amount that can be saved, and creates destructive asset bubbles in the process.

      The best example is the vast wealth created by the Baby Boomer Generation, arguably the largest, best educated working block of people ever assembled on the face of the planet. If their wealth is around $70 trillion, minus their share of federal debt and unfunded liabilities, they are collectively $100 Trillion UNDERwater!!!

      When the boomers the their peak earning years, they bid up the price of worthless tech stocks to the heavens, and we know how that ended. Another example is the Social Security Trust Fund. They correctly realized in the early ’80’s that the Baby Boomer generation would annihilate ‘pay as you go’ structure starting around 2010, if no changes were made. So they vastly increased the tax, with the idea that the amount of revenue collected that was over and above benefit payments, would go into a lock box, earning interest. Here, another common problem manifested itself. The govt. never met a dollar (or peso, or franc, etc.) that it couldn’t figure out a way to spend. So much for the ‘lock box’ concept.

  • No6:

    In Argentina you could be arrested for publishing this kind of heresy.

    Soon coming to the USSA no doubt.

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