Wikinvest Wire

It keeps getting worse for retirees and sick people

Tuesday, September 23, 2008

It really is hard to assess the sort of damage that is being done to the American psyche these days, now that the housing boom has gone bust and stocks are teetering on the edge along with the rest of the financial system.

After all, the entire system of fractional reserve banking is a confidence game - all banks are fundamentally insolvent. And until recently, few realized just how ephemeral their late-20th century wealth really was, as first stock prices soared and sank and then home prices did the same.

For years, we've been conditioned to think that housing was a good long-term investment - not simply a depreciating asset that provided shelter from the cold and the rain.

Economists thought so much of the idea of housing as an investment that they saw fit to remove the "investment" component of housing costs from the Consumer Price Index as explained in this FAQ at the Department of Labor.

That worked out quite well for more than 20 years - home prices (the investment part) could detach from the rental costs (the utility part) and we'd all be better off for it. But, now it seems to have bitten us all in the derriere as discussed here ad nauseum over the years, most recently in The complete and utter failure of owners' equivalent rent.

The idea that we'd all be able to manage our own retirement money was another bright idea from the 1980s that seems to be running into trouble these days. Even an idiot can manage his 401k account when everything is going up, but when everything starts falling, that's a different matter completely.

Harvesting dividends and capital gains on equity investments during their golden years with real estate wealth as a "backstop" has been always been the plan, but, for many, that plan is now souring.

Supporting longer and costlier golden years doesn't seem to be nearly as easy as it was a few years ago. That is, now that both home prices and share prices are going down.

The retirement lifestyle that many Americans must have believed to be a birthright is now slipping away as fast as home equity wealth and the mainstream media has noticed.

Three reports in the last two days tell of these current woes - it wasn't supposed to be work out this way.

Kelly Green writes in the Wall Street Journal:

IMAGEFor millions of Americans approaching retirement, events of recent weeks are delivering a clear message: Not so fast. With nest eggs shrinking, housing prices still falling and anxieties about their financial future growing, the oldest members of the baby-boom generation are putting the brakes on plans to leave the office.
As discouraging as that message might sound, it's exactly what many baby boomers need to hear, according to financial planners and researchers. Most people underestimate how much money they will need for retirements that could easily last two or three decades, and are leaving the work force with nest eggs that are likely to expire long before they do.
Those with defined benefit retirement plans must be thanking their lucky stars that they didn't take that higher paying job at mid-career without the "traditional" pension that seemed so staid and stolid back when the equity bull market kicked into high gear.

Also at the Journal, Vanessa Fuhrmans notes the changing landscape of health care:
As the credit crunch threatens to throw the economy into a deep slump, Americans are already cutting back on health care, a sector once thought to be invulnerable to recession. Spending on everything from doctors' appointments to preventive tests to prescription drugs is under pressure.

The number of prescriptions filled in the U.S. fell 0.5% in the first quarter and a steeper 1.97% in the second, compared with the same periods in 2007 -- the first negative quarters in at least a decade, according to data from market researcher IMS Health. Despite an aging and growing U.S. population, the number of physician office visits also has been declining since the end of 2006. Between July 2007 and 2008, the most recent month for which data are available, visits fell 1.2%, according to IMS.
One can only imagine what it's like for those in the business of elective medical procedures these days. How many stories have you heard about some friend, neighbor, or co-worker who "tapped" their home equity for a boob job or liposuction?

And lastly, John Leland and Louis Uchitelle write in the New York Times about the dread that some seniors live with, day in and day out, knowing that time is not on their side.
Older Americans with investments are among the hardest hit by the turmoil in the financial markets and have the least opportunity to recover.

As companies have switched from fixed pensions to 401(k) accounts, retirees risk losing big chunks of their wealth and income in a single day’s trading, as many have in the last month.

“There’s a terrified older population out there,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “If you’re 45 and the market goes down, it bothers you, but it comes back. But if you’re retired or about to retire, you might have to sell your assets before they have a chance to recover. And people don’t have the luxury of being in bonds because they don’t yield enough for how long we live.”

Today’s retirees have less money in savings, longer life expectancies and greater exposure to market risk than any retirees since World War II. Even before the last week of turmoil, 39 percent of retirees said they expected to outlive their savings, up from 29 percent in 2007, according to a survey by the Employee Benefit Research Institute, an industry-sponsored group in Washington.
Whatever happened to the good 'ol days when you could invest your money in super-safe fixed income investments and still stay ahead of inflation?

Is that such an unreasonable request in a modern society?

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Chuck Ponzi said...

Yes, it is an unreasonable request, but you already knew that. You can't have a kleptocracy without kleptomaniacs.

2 nits to pick, though.

The way I read the general press, it appears that most defined benefit pension plans are or are about to become bankrupt. You can't maintain defined benefits when real interest rates are negative (especially when price inflation on those "benefits" are much higher than the 3% you can get for you safe investments). Who do you think was buying the MBS tranches? DBP Plans were trying to goose enough returns to actually remain solvent. Now that this is out the door, we will likely see at least a few fail without good returns coming back.

In addition, it is only anecdotally, but I know some people here in Orange County who own and work for cosmetic surgery centers. Work has been much brisker in 2008 than 2007, according to all that I know. Yes, yes, it too small of a sampling size, but I'm having difficulty reconciling their version of reality with how I had expected things to play out.

TJ said...

I don't work in the medical field, but I have friends and family who have experienced the American medical system, and the stories I hear are disheartening. First, everyone I know who's received major medical care has had to pay what I consider to be over-inflated medical care costs. These costs take a large percentage of personal budgets, which can lead to financial hardship. I've heard of some financial hardships leading to bankruptcy (think expensive cancer treatments). Second, some people take advantage of medical care by seeking medical care for minor issues, such as a common cold, and then have health care insurance companies pay for the care. Insurance companies share risk among all participants, so when insurance companies pay over-inflated prices, all participants pay the higher premium.

I can imagine more doctors will compete for more patients, which will drive down costs, more people curtail visits to the doctor's office. However, if the American Medical Association (AMA) artificially reduces the number of doctors allowed to practice medicine, this will be a form of price support in the medical field - fewer doctors per capita would mean greater demand, thus higher prices per doctor.

I welcome a more competitive medical system for our country, despite the current economic recession.

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