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Home Publications Blogs Beat the Press The Washington Post Tells Readers that Workers Will be Much Less Prepared for Retirement in the Future

The Washington Post Tells Readers that Workers Will be Much Less Prepared for Retirement in the Future

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Wednesday, 16 February 2011 06:03

The Post probably did not realize that this is what it was telling readers, otherwise it should have been the headline of the article, but this is the logical implication of the assertion in the middle of the article that:

"analysts who study personal finances say that savings rates and debt ratios are not going to return to their 1980s levels."

This statement means that the savings rate will remain near 5 percent instead of rising back to its historic rate from the 80s and prior decades, which was over 8.0 percent.

If these analysts are right, this means that workers will accumulate less money for their retirement, relative to their income in their working years, than their parents and grandparents. With Social Security providing a lower replacement rate and Medicare premiums and other health care costs rising relative to income, this means that retirees will be relatively poorer in the future than at present. This will be even more true if Social Security benefits are reduced further.

It is also worth noting that a lower private sector saving rate has the same impact on the economy as a higher government budget deficit. Given that the Washington Post has been virtually obsessed with the budget deficit on both its news and editorial pages, it is striking that it appears so little concerned about the prospect of lower private sector savings.

Remarkably this article also never mentions the housing bubble. The run-up in house prices was the cause of heavy consumer borrowing in the years prior to the downturn. Conventional estimates put the housing wealth effect at 5-7 percent, meaning that consumers will increase annual spending by between 5-7 cents for each additional dollar of housing wealth. When the bubble burst, destroying $6 trillion in housing equity, it was entirely predictable that consumption would plummet.

Comments (5)Add Comment
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written by skeptonomist, February 16, 2011 8:30
Speaking of bubbles, one that has apparently gone unnoticed is the bubble or bulge in corporate profits since 2003:

http://research.stlouisfed.org/fred2/series/CP?cid=109

Actually, this is not a bubble since that was real money that was taken in by corporations, although one thing they seem to be doing with it is buying their own stock, possibly inflating another bubble in the stock market. What they are obviously not doing with the money is hiring workers as they are supposed to do according to supply-side dogma.

Where is the discussion of corporations and their CEOs and stockholders "sharing the burden" of cutting deficits, since it is they who now have the money? Apparently it is OK to take back the money which workers paid into the SS Trust Fund, but past, present and future corporate profits are sacrosanct and can't even be mentioned in this context.
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written by liberal, February 16, 2011 8:38
skeptonomist,

Interesting graph. I'd like to see two related graphs: log profits, and also fraction of GDP. Also would be good to see what ex-finance looks like.

How much of this growth in corporate profits do you think is related to the availability of cheap cash?
Saving for the "end of work"
written by Dean Marshall, February 16, 2011 9:28
Whether overtly or covertly "American exceptionalism" is being hollowed out to such an extent that most baby boomers will only survive through the golden years of their retirement through the "kindness of strangers".
As our country continues to crank out legions of college graduates into a barren job market we're starting to see how the insidious lies and hoax of "globalization" are really playing out for our economy. We appear to be degenerating into a "third world" type abyss with just a thin patina of our former middle class leviathan to console us.
...
written by PeonInChief, February 16, 2011 12:28
I think the article may be right. The savings rate hasn't been above 8% since 1985, and the 20-year average from 1990-2009 was 4.34%. The high savings rate from 1973-84 may simply have been that homeowners who bought their houses prior to the great inflation were paying very small mortgages.
Which definition of "Savings Rate", again?
written by Wisdom Seeker, February 17, 2011 12:06
I would like to know what really is included in "Savings Rate". Are 401k contributions counted? Mortgage principal payments? Pension fund contributions? What about the increase in market price of pre-existing investments? The "Savings Rate" as a mean average is a statistical abomination regardless, since huge swathes of the population have no savings worth mentioning while a tiny sliver controls the majority of the wealth. It does no good to the rest of us if the top 1% save more and lock up their money in socially useless "investments" where the tax man can't reach it to recycle it back into circulation, does it?

Meanwhile, corporate profits as share of GDP have returned to all-time highs, with Proprietor's Income still fading and with Employee Compensation closing in on historic lows:

http://research.stlouisfed.org/publications/net/page21.pdf

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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