Consumer Confidence and Retirement

Sharon Astyk calls our attention to Federal Reserve Chairman Ben Bernanke’s confusion as to why people aren’t spending more. Let’s see what Bernanke had to say (boldface mine):

One striking aspect of the recovery is the unusual weakness in household spending. After contracting very sharply during the recession, consumer spending expanded moderately through 2010, only to decelerate in the first half of 2011. The temporary factors I mentioned earlier–the rise in commodity prices, which has hurt households’ purchasing power, and the disruption in manufacturing following the Japanese disaster, which reduced auto availability and hence sales–are partial explanations for this deceleration. But households are struggling with other important headwinds as well, including the persistently high level of unemployment, slow gains in wages for those who remain employed, falling house prices, and debt burdens that remain high for many, notwithstanding that households, in the aggregate, have been saving more and borrowing less. Even taking into account the many financial pressures they face, households seem exceptionally cautious. Indeed, readings on consumer confidence have fallen substantially in recent months as people have become more pessimistic about both economic conditions and their own financial prospects.

Admittedly, no one ever truly understands what the hell a Federal Reserve Chairman says, but still, given the litany of problems Bernanke recites, how could he expect anything but caution? Didn’t exactly see a silver lining in his description. And this was the optimistic part.

At Naked Capitalism, Yves Smith nails six theses to the door about why, oh why, citizens consumers might be skittish:

1) Water turns to blood.
2) Frogs…

Oh, wait, that’s the Ten Plagues of Moses. Sorry. Anyway, Yves lists the following:

1) Much lower labor participation in economic growth.
2) Shorter job tenures. (Aside: once you hit a certain age, swapping jobs every few years is not fun).
3) Difficulty of staying employed over the age of 40.
4) Two income trap.
5) Higher loads of student debt.
6) Worse prospects for retirement.

I want to quote Yves at length about the last item, retirement:

Bernanke also stunningly missed how the risk of retirement income has been shifted onto consumers. Defined benefit plans have become defined contribution. People who thought they had a secure pension have had them cut back. And how do you earn enough to retire these days? MyLessThanPrimeBeef did some math:

If you make $50,000/yr before retirement and wish to have 60% of that after retirement, how much do you have to save in order to earn that much in your 0.5% bank account?

Let’s see, $50,000 x 0.6 = $30,000

@ 0.5% interest:

$30,000/0.005 = $6,000,000.

If you didn’t have to split it, throughout your working career, with the government and if you didn’t have to eat or support a family, it would only take you 120 years to save up $6,000,000.

Assuming you started working @ age 12, it would mean you can comfortably retire when you’re 132 yr. old.

Plan accordingly (for those without defined benefit plans)!

Now of course Bernanke would argue that assuming a 0.5% interest rate over 120 years is proof of undue pessimism, but making the assumptions more realistic (taxes, expenses, some reversals due to job interruption or emergencies) puts you in a not-very-different place.

The obvious solution is, therefore, to claim that raising the Medicare age and cutting Social Security payouts is fiscally responsible.

What I do not understand is all of the ‘shared sacrifice’ crap that Very Serious People keep talking about. Too many people–and not just the poor–have nothing left to sacrifice. They’ve already sacrificed for decades under the neo-liberal onslaught against the middle class.

To return to the economy, as I’ve noted elsewhere, the middle class stayed afloat primarily through debt accumulation. Yves:

This fundamental deterioration in the finances of ordinary households was masked by access to debt. When I was a kid, no one financed a car. And no one could use their house as an ATM. Too many assumed they could rely on house price appreciation as a proxy for saving. We know how that movie ended.

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