The Perils of Savers

One of the hardest lessons of the Great Recession has been accepting the fact that one need not have done anything imprudent, excessive or unlawful to find oneself a victim of it anyway. If you did not let your credit card debt mount precariously, or take out a mortgage beyond your means or connive to urge others to do so, you likely have still seen the returns on your stock and bonds plummet, your salary or raise be frozen, cut back, or worse. Your home is not worth what it was just a few years ago. And you can’t find a decent rate of return on your investments, if you are lucky enough to have any. In this respect, the man-made recession (which is what it is) resembles a natural disaster: When a flood or a hurricane hits, it wreaks havoc on whoever is at hand.

Without a doubt, the U.S. government has a tough job to do in trying to fine tune the domestic economy, which is not only complex and enormous, but also fluctuates, depending on what other nations and governments do. And it falls to our government (under “to promote the general welfare”) to figure out how to stabilize the economy and stimulate growth, while also assisting those hardest hit by the recession. That assistance includes even those who acted irresponsibly by engaging in risky spending, borrowing or lending. Of course, such government assistance incurs the wrath of other taxpayers who did not act irresponsibly and who do not want to pay for the foolishness of others. Which is why the idea of a “bailout” goes against the grain of so many Americans brought up to believe in that phantom “rugged individualism.” In fact, we are all connected in the economy even if we would prefer not to be and would prefer to think of ourselves as individualists, rugged or otherwise.

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Today’s news highlights one more group hard hit by the recession, whose plight should be seriously taken up by government and civic leaders as they make policy—persons who live on a fixed income, especially those who had responsibly planned to live through retirement subsidized by the “earnings” of their life savings. The “earnings” rates are now less than 1 percent, and on “safe” government treasury bonds are near zero. This is the sad situation of some of the most self-reliant citizens among us, most of whom began living on reduced incomes before the recession.

In trying to stabilize the economy by holding interest rates down, the Fed, has inadvertently tightened the belts and circumscribed the lives of savers—mostly seniors with few options left to raise cash or increase their wealth. How long will the interest rates remain weak? No one knows.

Still, habits of saving, thrift, and living within one’s means add stability and economic security, up to a point.

Right now, workers enjoy incentives to save, the primary one being the tax-deferred savings programs, known as 401k’s or 403b’s. Workers can sock away part of each paycheck, tax free, although they will have to pay taxes on the money later when they withdraw the principal and earnings in retirement. The presumption is that by then, their tax rate and/or their taxable income will be lower. Which means, they effectively realize the difference. With interest currently so low on savings, workers who put every dime they can into such programs might do very well if the difference in tax consequences is greater than the return on most other investments.

Those without a paycheck, however, have no such opportunity. (For them, fixed-income investments have seldom looked so good.) Such people, mostly seniors, are on their own. As the economy sputters and the flood waters recede, they watch their savings dry up.

 

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Pearce Shea
8 years 3 months ago
It's sad but it's true. With the nearly un-resolvable increases in social security (the timeline extended to the nth year indicates staggering exponential growth in coverage cost for ss) I really don't know what the solution is.

I also think that the "phantom of 'rugged individualism'" (what does that even mean?) is not what spurred most disgust with the bailout. On the one hand, the right-leaning conservatives hated the bailout because it stank of government trying to stick their ham fist into the economy to tip the scales whereas left-leaning liberals hated it because it smacked of corporate cronyism (I think I'm using that term correctly). Where the heck did you come up with "rugged individualism?"

And I'd point out that "to promote the general welfare" as you've construed it is decidedly not how conservatives construe it (promoting the general welfare to them would be to get government the heck out of the way of the workings of the economy, etc.). Don't know who is right as to that one, just pointing out one of your basic assumptions isn't exactly concrete.
8 years 3 months ago
Seniors were probably hit the least by the housing prices since most of them probably had paid off their houses or used the profits from previous houses to finance whatever new ones they bought.  The people who got hit the hardest are those who have been in a house for only a short time and either bought for the first time or traded up for a bigger house as their family expanded.


The average price of a house rose 90% from 2000 to 2006 (normal yearly increases average between 1 and 2%) and has dropped nearly 45% since then.  So seniors are much better off than their neighbors who are younger who only saw a decliine.  However, it is hard to tell them that since all they knew is what they could have gotten in 2005 or 2006.  But in reality they are better off as far as their house is concerned then those who had no equity in this house and now find themselves under water.  There will always be exceptions but most seniors have not been too hurt by falling housing prices.  As I said house prices since the Great Depression have risen about 1-2% a year so the early part of this decade is the anomaly.  What caused these houses to rise in price is at the heart of the financial crisis.  It is definitely man made and the culprits are well known.  Some have been punished but many have not.  I know one who is being touted for the presidency in the future and is guilty as anyone in the country for what happened.


The elderly' stock market gains were also artificially caused and many people's new found wealth was a fluke of history and not due to any special insight by investors.  My wife and I made out well with the 90's rise in the stock market and the rise again in 2002-2006 as we had 401k invested in the stock market but lost out each time when it crashed.  We were riding a wave and like a lot of Americans were lucky and then unlucky.


The real problem is down the road and not too far down the road as unfunded pensions are coming due and the states and municipalities do not have the money to pay the government workers and teachers their promised retirement wages and benefits.  The stimulus from last year essentially went to prop up these people and they just got some more a few weeks ago.  So the public employees are ok for now as they loyally vote Democrat and were taken cared in the stimulus monies.   Who wasn't taken cared of are the new graduates and the poor.  There is little work for them so that is where the highest unemployment rates are.  They are the ones you should be concerned about.  But the Democrats don't worry about them because the poor and young are loyal Democrats because they don't know they are being screwed.  When these groups finally wise up, maybe never, it will be the end of the Democrat party.
8 years 3 months ago
If its true that "we're all connected in the economy", then, with respect, "seniors" are the last economic group I will cry crocodile tears for.  Due to the mis-incentives provided by Social Security, most "seniors" retired too early to begin with.  Contra "rugged individualism", they, like many Americans increasingly dependent on the government teat, have decided to stop working well before they should have because they could prosper off younger workers and the slavish promises of the government still considering most "seniors" to be the destitute old from the Great Depression that we see pictures of.  The bloggers would do well to take a course in demographics.
8 years 3 months ago
I would like to add that this kind of mis-guided mash is why Catholic economic principles remain a joke to most serious economists, left and right.
Pearce Shea
8 years 3 months ago
I agree with JR as to the fact that the portfolio of any elder saver may well still be valued higher than it was a decade ago, but I do think he misses the point: most retirement portfolios are structured so that regular dividends and bond payments can supplement whatever may be coming in from a pension and social security. Insofar as the fed has tried to squash rates and inflation to boot, the return on the investments is near-nil.

But again, the elderly are hurt more by failing, over-pledged and unfindable pensions than by a low interest rate. If they are relying primarily on investments for their retirement income, they are likely quite well-off indeed.

I am sorry to say that I echo Jeff's second comment (if not the sentiment): there is not a lot of "good thinking" about economics going on in this blog post.
Vince Killoran
8 years 3 months ago
Jeff, I'd love to have a list of the "most serious economists" who consider this perspective a "joke."  Why is it that, every time an article appears on this website on economics, the same small group of bloggers rush to denounce it as amateur and wrongheaded.  To be honest I didn't pick up that you guys had any training in economics either.  I'm not certain why, of all the kinds of articles that appear here, you all insist that one hold professional standing in order to comment (BTW, I love the title of a book directed to fellow economists Donald McCloskey wrote a few years back: "IF YOU'RE SO SMART WHY AREN'T YOU RICH?").




Seniors got caught in the whirlwind of "market populism" and suffered from an under regulated, overheated economy.  Those pension checks that my grandparents used to receive look pretty damn good about now.   
8 years 3 months ago
'' but I do think he misses the point''

No, I didn't miss the point.  I was just responding to the over all bleak picture for the elderly which are not as hard hit as younger people.  I am not sure what the intent of the article was but it missed out on who has really been hurt by the financial crisis.  It is not seniors.  They all have good health insurance and an income  though some of it may be less than before.  I understand that fixed income returns are currently very low and have family members who are affected but it means that many will just have to do with less as most are currently.  


Interesting is that some of our fixed investments are still generating 4-5% a year and we have been waiting for them to go down and they have a little.  One is a life insurance policy and the other is a TIAA account for when I taught.
8 years 3 months ago
''the same small group of bloggers rush to denounce it as amateur and wrongheaded''

I am not aware of any of the authors having a background in economics so why are they posting on it.  Most of the posts reflect an unawareness of the issues involved.  I personally have had economic courses at three different times in my life and follow it closely nearly every day.  So am I supposed not to comment because I do not have a Ph.D. on the topic or work in it at the moment.  If we are wrong or off base, provide a rebuttal.
8 years 3 months ago
Mr. Killoran -

As to your first point, I suppose you are right in a way.  In order to find those principles a joke, I'd have to first assume that some economists actually pay attention to Catholic economic principles, & thus produce the list of those bothering to comment.  Perhaps making that assumption is wrong, since I don't see any leading economists (Krugman, Mankiw, Friedman, Roemer) actually taking Catholic social teaching very seriously.  I stand corrected.

Secondly, I didn't (or don't) mean to suggest professional economic training is required to comment on economic matters; I certainly have no more than a basic college education in the topic.  But I do try to read and take seriously economic ideas as they are presented in the press.  That I find that many of the economic-related posts do not similarly take economic princples seriously and express that opinion is, I believe, protected by the First Amendment & dissent used to be encouraged by liberals.  Did I miss the memo?
Vince Killoran
8 years 3 months ago
First Amendment?  I didn't mention it, but I'm all for it.  My only point was to practice a bit of it myself and challenge the ridiculing nature of the comments.

Now, on to the actual substance of the argument. . . 
Stanley Kopacz
8 years 3 months ago
Well, if you were a good boy or girl and saved all the money you could, you can get a whopping 1% on a CD.  If you could live on $30,000 per year, you'd have to have accumulated around$760,000 in savings to last 30 years in retirement.  Assuming an inflation rate of 3%, make that around $1,150,000.  Of course, there's always the Wall Street casino.

Also, with regard to young people supporting retirees, if the old people keep working doesn't that make for fewer jobs for the young.  Some older people would be happy to work, but their jobs were given to young people in China and India.  Good luck getting a new job if you're in your fifties.

The system, as it is, isn't working.  If they come up with a virus that only kills people over 65, problem solved.
8 years 3 months ago
Only a few years ago (late 2007) we were at full employment which is when the official numbers are below 5%.  So what has changed so drastically in the last 3 years to make that unattainable again.  Not really anything except the financial crisis brought on by the housing chaos and mortgage bonds, not a dislocation in any particular industry except those related to housing.  There is no reason to think that employment rate could not be achieved again if the right economic policies are implemented.  It was in reality only yesterday when we were full employed.

Manufacturing in the US has been increasing in recent years as we make high end equipment here.  Low end materials such as buggy whips and shoes are made over seas and if they came back to the US would at best provide minimum wage jobs. 
8 years 3 months ago
For those who continually bring up the demise of manufacturing in the US, read the following:

http://www.cato-at-liberty.org/the-rumors-of-manufacturings-death-have-been-greatly-exaggerated/ 


Ray Kurzwell in his book, ''The Singularity is Near'' he makes the point that all manufacturing will come back to the US, even buggy whips and shoes because all will be made by computers.  A similar revolution happened in the early 20th century when farm workers left the fields for the cities as farming became more and more mechanized.  Kurzwell obviously exaggerates because there will always be comparative advantage between areas.  Here is a link to Kurzwell's book.

http://www.amazon.com/Singularity-Near-Humans-Transcend-Biology/dp/0143037889/ref=sr_1_1?s=books&ie=UTF8&qid=1284155733&sr=1-1 


Pessimism is easy. It often is not accurate.
8 years 3 months ago
For those who want to get up on the latest in economics, the Teaching Company has a couple courses.  Here is one


http://www.teach12.com/ttcx/coursedesclong2.aspx?cid=550


There are others and can probably be taken out of a local library.  The always go on sale every 3-4 months for about 25% of the official price.  They are usually very good.


For those who want to learn about the housing crisis and money and banking, there is an online video library by Salman Khan.  He recently got fame as Bill Gates said he was the future of learning and his kids use his videos.  Most of his videos are on math but he has a whole series on several economic topics.  Here is the link to his online and free library



http://www.khanacademy.org/
Stanley Kopacz
8 years 3 months ago
Why should buggy whips and shoes be made back in this country by computer numerically controlled (CNC)  machines?  They can be made and automated in other countries where they are already made.  And who says the workers in other countries are being given just wages, even by their standards?  Another thing, the motivation to automate comes when workers are highly paid.  If a shirt can be made for pennies and sold for tens of dollars, why automate?  It makes no economic sense.  These facile predictions by technogurus like Kurzweil (they should be labeled as possibilities) are readily lapped up by economic neoliberals to make them feel warm and fuzzy about the status quo.  I don't know if there's a cure for this mess but I'm not about to wallow in a false optimism, especially for the people who are less technologically skilled than I am.  As the saying goes, "I'm alright, Jack" and will be for the forseeable future.  But I hate to see honest, hardworking people have their jobs zeroed out in an instant.  I'm not telling those people that a wonderful new world is coming around the bend, someday.  They are screwed now.

The evolution of wages under the present capitalist system showed a remarkable and steady growth in income until the 1970's.  For the general populace, this has leveled off and has not been increasing since.  That's the bottom line.  What has worked before no longer works. 

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