$2 Million Per Household Means Doom For Dollar
What is the total cost of all United States retirement promises and expectations, and what are the implications for the dollar? In this article we are going find a startling answer to that question - approximately $2 million per able to pay household. To get there will involve taking five steps:
* Start with the well-publicized figure of $500,000 per household for the present value of government retirement promises;
* Subtract out the below poverty line households
* Subtract out the past retirement age households
* Add in the cost of cashing out pensions, IRAs and Keoghs
* Convert from current dollars to total dollars
When we add those simple steps together, we will find that our answer is an impossible sum - if the dollar in the future is worth anything close to a dollar today. Far too many symbols have been promised relative to the actual resources that will available - meaning doom for the dollar. We will close by discussing how through understanding this issue - we can find the means to turn it from major societal problem into potentially lucrative individual opportunities for building wealth on a long-term and tax-advantaged basis.
The Big Picture
The chart below is a rough blueprint for retirement related expenses over the years ahead. Call it the Baby Boom's promises to itself, which the Boomer's have done their best to legally obligate their descendents to pay for in as many ways as possible:
Line (1) begins with a fairly well known figure, from a USA Today article in May of 2007, that showed that the unfunded expenses of paying for future government retirement promises was $59 trillion, or about half a million per household (link below). The $59 trillion is not the total expected expenses, but the deficit after taking out the revenues our current tax structure is estimated to generate (assuming current economic growth rates continue).
That $59 trillion is shown in the "Current Dollar" column of our chart, because it is inflation-adjusted, meaning much of the assumed value of the dollar has already been destroyed in getting there. This is routine for the presentation of future societal costs, as what we want to get to is "real wealth", that being goods and services, so we adjust out the anticipated inflation. However, our objective in this article is to understand the impact of future promises upon the value of the dollar, so we don't want to start with a footnoted assumption that half the value has already been destroyed. We therefore make a rough (and quite conservative) adjustment to bring the total back to dollars before inflation. A 3% level of inflation will drop the value of a dollar in half over a little more than 20 years, so we multiply the half destroyed dollars by two, and come up with $118 trillion in dollar promises, in the "Total Dollar" column. (As discussed below in footnote (1), the chart combines two models with differing terms and other assumptions. Painting with broad strokes and assumptions is appropriate when looking at future retirement obligations, as the details can't be known in a number of crucial areas.)
The Boomers are of course counting on much more from the generations behind them than just Medicare and Social Security, however, they want their pensions, IRAs and Keoghs cashed out as well. Using some reasonably conservative assumptions, that total comes to about another $44 trillion (or $22 trillion in half destroyed dollar terms). The link below leads to a 50 page report which demonstrates the calculation of that $44 trillion total, based on underlying Census Bureau and Federal Reserve household statistics:
After adjusting for a bit of double-counting of state & local government pensions, the total dollar amount comes to a whopping $160 trillion that future retirees expect the generations behind them to pay, with most of that total consisting of legally binding promises. Even when we destroy half the value of the dollar in advance, we are still looking at a figure of $80 trillion in current dollars. Those numbers are so high that are almost impossible to comprehend. For perspective, we could say $160 trillion is 3 times the size of the total global economy, and it represents promises that only about 1% of the world's population (US retirees) have made to themselves. Other than saying it's fantastically high, it is hard to derive meaning from figures like that.
USA Today tried to make these vast numbers more understandable by putting them into per household terms. Take the $59 trillion in current dollars, divide it by all 111 million household in the United States, and you come up with each household needing to pay over $500,000, if retirement promises are to be met (not including private pensions and retirement accounts). Remember - this is assuming that half the value of the dollar has already been destroyed. If you are comparing to the dollars you have in your bank and investments accounts right now - total obligations work out to over $1 million per household (line 14 of the chart).
The government has promised to pay benefits representing a cost of $1 million per household. What has already been promised is obviously impossible if a dollar is worth a dollar. It's also impossible if a dollar is worth fifty cents, as in the USA Today projections, for we can't expect the average household to come up with half a million dollars. To make the impossible into the possible - is going to require doing a much more effective job of destroying the dollar than merely cutting it's value in half, as we will review a bit later. But before that, we're going to have to do a better job of determining what the real costs per household are going to be. For, unfortunately, the USA Today number included too many households, and too few expenses - the full picture is much worse.
Per Census Bureau statistics, there are indeed 111 million households in the US, but 11 million of them are below the poverty line. They are not able to pay for themselves in full, let alone bear the tax burdens of cashing out others. So we drop down to 100 million households able to pay, as shown in line (7).
Next, the implicit assumption within all households paying for retirement expenses, is that the retirees are paying for their own expenses, in some sort of endless circle, where they pay themselves so they can pay themselves so they can pay themselves. From a currency perspective, tapping some retirees to pay for promises to less wealthy retirees is quite likely at some point, but when we look at goods and services, the games end. The retirees need goods and services, the non-retired will be producing the goods and services, and by 2027 we will be down to about two people of working age for every one person of retirement age.
So we adjust down by 33 million in line (9), but that is too much, because the youngest Boomers will still be working after the oldest Boomers have retired and even passed away. So we adjust back for Boomers still below retirement age in lines (10) and (11), and find that over the next forty years or so, an average of about 21 million Boomer households will be past retirement age, and not providing the goods and services they will need to consume in retirement. (This adjustment is one of proportion, rather than purely numbers of households. Yes, new households will be entering the workplace, yet, there is no getting around the heart of the demographic problem, which is the steady decline down to two workers for every person of retirement age over the next twenty years.)
We are now down to about 79 million households that are above the poverty line, and won't be (on average) over retirement age themselves. When we compare this number of households that will be effectively paying to the total government costs - then the total comes to a staggering $1.5 million per household (line 16). Even when we assume the destruction of the half the dollar to put it in the present value terms, then adjusting for below poverty line households not paying their share, and retiree households not paying for their own benefits, brings the total up to three quarters of a million per household.
Then we need to add in the costs of cashing out all the private pensions and retirement savings. The dollars to cash out those pensions and the associated goods and services will need to come to come from somewhere - and that somewhere is the productively working rest of the economy, which is our 79 million households above the poverty line and below the retirement age. This adds another full half million dollars per household (it will cost you a mere quarter million if you pre-assume that half the value of your dollars have been destroyed). It is also worth noting that most private pension promises aren't really private, as the federal government guarantees pension payments through the Pension Benefit Guaranty Corporation. This means that from a taxpayer's perspective, the government has effectively issued a standby guarantee for private pension investment performance.
As shown on line 20, our total is now a staggering $2 million per household, when we include all the retirement expenses, and look only at households "able" to pay. A promise that will be impossible to keep - so long as a dollar in the future is worth anything close to the value of a dollar today. Which brings us back to the central flaw in the USA Today study, a flaw with profound implications for all of our long-term investments.
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