Thursday, October 13, 2011

Older Americans hit the wall

People as a whole are a little less in debt than when we first went into the financial crises in 2008.  The overall debt load since 2007 has dropped 15%.  Much of that reduction appears to have come from outright defaults: no doubt a result of many people losing their jobs when they were underwater on the principal of their assets.  Since they could not sell them to pay off the debt, they defaulted.
Even with the near term reduction in the debt load, we have almost twice as much consumer debt ($11.4 trillion) as we did in 1999.
With what we have in productivity increases going almost completely toward corporate profits rather than wages (in real dollar terms), all Americans are being squeezed.   But one group is finally getting to that point of truth, where expectations are meeting reality: the retiring baby boomers.
E.S. Browning, Wall Street Journal, 7 September 2011.
More Americans are reaching their 60s with so much debt they can't afford to retire.
Most people used to pay off their debts before retiring. But as wages have barely kept up with rising prices over the past 35 years Americans have pushed debt higher, living beyond their means. Now, people are postponing retirement, cutting living standards or both.
The article goes on to note that previous retirees had relied on increases in housing prices to pay off any debts that they might have, and use the difference in pricing to downsize to a smaller home and less expensive area to live.  With home values crashing due to the housing bubble burst (peak home sales August of 2005), that option is no longer a viable one.
Even without the bubble, the baby boomers would have had a difficult time.  One of the reasons that houses were going up in price was that the big lump that was the baby boomers were buying them.  Just as it has never been clear how we were going to pay for 2/3 of our population to retire (regardless of how the paper money situation says we are solvent or not), it has never been clear who was going to buy all these middle-brow assets that the boomers intended to sell.
The article notes that many of the baby boomers have not choice but to keep working.  But it is not really clear if that will be an option for them.  Even if you are still able to work at 70, it is not clear that you would be as productive as when you are 55.  I work around people who are not even 60 yet who are an overweight physical wreck.

found: here

Of course the spending culture, that was amplified with the boomers has not helped.  To continue from the article:
Four out of five households with heads in their early 60s and with mortgages had too little savings in 2008 to pay off debts without dipping into retirement accounts, according to Boston College economist Anthony Webb.
Instead of boosting their savings as they approach retirement, a period when people usually make their largest retirement contributions, some older people are stopping contributions in order to service debts. Some who had already retired are going back to work because they can't make the financial numbers add up.
The combination of easy credit, low interest rates and a consumption-oriented culture helped fuel a spending binge for Americans until the financial crisis. People with problems aren't just those who took subprime loans or spent foolishly on lavish lifestyles. They are people from all backgrounds, including some with six-figure incomes.
The article goes on to note that the 2007 typical (median) mortgage debt in real terms was five times the 1987 level for people in their 60s. $71,000 dollars of mortgage is a lot of a load when you are supposed to be winding down your expenses.  The biggest real advantage of mortgage is not the supposed “equity” you get out of it, but that at some point you no longer have to pay it: rent is forever.
The article makes a point of noting how many parents have gone in to debt funding their children’s college education.  I am not as down on the practicality of a four year liberal arts degree, presuming it is more along the lines of an accounting versus anthropology degree, as some.  But the evidence that links future success to the more expensive private rather than an in state school are a little thin.  It generally only applies to a handful of very competitive professions (doctors, lawyers), not to the lines of work that most people go into.  Going into debt to pay for your children’s overpriced education strikes me as a foolish.   To the extent it generates even a little debt, they have far more time to pay it back then you do.  If you cannot pay for something like that out-of-pocket, it means that you cannot afford it.

Also found:  here
Along these lines, the article notes that many seniors have no intention of leaving any money to their children.  There is a hint that the children (who as we know have been staying at home longer) have gotten all they are going to get.  Spendthrift parents beget entitled children I gather.
From a societal point of view, this is a disaster.  Historically, one of the ways that a society has built up its wealth is through the slow accumulation of assets.  If you look at the Europe in the Middle Ages, it can often look like not much is happening year-in year-out on an economic basis.  But they were building.  And over time, they slowly built up more and more physical asset wealth, and the next generation was able to use it.
The children of the middle class (self entitled or not) will have disrepair roads, bridges, dwindling supplies of fossil fuels, and likely no start toward owning the roof over their head.  No doubt some will get these on their own.  But historically the middle class did not start from scratch with every generation.  Forced to start from scratch, it is likely you will see the growth of a sort of muddled class:  educated, but poor in assets.  With very little in the way of real wealth, they will likely turn to consumer finance, and continue the cycle further downward.
Presumably this is why banks feel that it is a good idea to get into payday lending.  Payday lending won’t be just for the working class, it will be a white collar product as well.


dennis said...

This is the generation taught as children to use "savings" accounts. One of the rights of passage was your own savings account. Save for a rainy day. Now days they charge you to have a savings account and the door to adulthood is a credit card.

russell1200 said...

Our current economic system works on expanding demand.

When real wages started to take a hit in the 1970s and 1980s (timing depends on the exact metric you use), borrowing was the only way to keep the game going.

The 1920s was our first consumer finance boom, and it is one of the (mostly) untold stories of the Great Depression. What I don't know is if there was a similar erosion in wages, or some other factor (possibly the new advances in manufacturing glutting a market with the financing there to prevent a deflationary crash) that brought it on.