A new report from the Employee Benefit Research Institute (ERBI) shows that the U.S. continues to be delusional about the adequacy of its public and private systems.
The ERBI report revealed that Americans’ retirement savings rate shrank in 2009 from 65% to 60%.
The last time U.S. households saved so little for retirement was at the stock market’s 2007 peak. And the only time they saved less was in 2004, when U.S. stocks were rallying strongly following the dot-com collapse and 9/11.
Optimists will point to the fact that this means more spending and less saving. If American households were to save the necessary amount for retirement – a return to a savings rate of 8% – it would suck an estimated $513 billion out of the U.S. economy.
The long term results of this lack of saving could be disastrous. According to the ERBI, about 40% of American workers are not saving for their retirements because they believe their assets – primarily their houses and their investment portfolios – are going to bounce back in value.
In other words, they are relying on the Federal Reserve’s efforts to reflate the bubbles in housing and stocks that burst following the subprime debt collapse. This is equivalent to walking a tightrope without any safety rig: the chances of crossing to the other side unharmed are small.
If the rebound that these non-savers expect doesn’t come about, they will find themselves in a very deep financial hole indeed. This unthinkable outcome would place new stresses on the already overburdened U.S. Social Security system…and on U.S.A. Inc.
Believe it or not, the picture gets even grimmer when you drill down into the ERBI’s numbers. According to its report, a whopping 27% of American workers have saved less than $1,000 toward retirement. With 54% of the labor force over the age of 40, this becomes nothing short of a doomsday scenario.
Think of the U.S. economy as a hot air balloon and Ben Bernanke as its pilot. So far, Captain Ben’s liberal application of the gas burners (cheap money) has stopped the balloon from crash landing. He now faces two serious problems.
First, the balloon is carrying some serious ballast (high levels of unemployment, sinking house prices, shrinking consumer credit, shaky commercial property loans, fiscal strain, etc). This ballast threatens to overwhelm the burners and ground the balloon.
Second, Captain Ben has only a limited amount of gas onboard. Just as he cannot continue to flood the economy with cheap money, he cannot continue to keep the blasters on full power forever.
For professional traders, betting (with other people’s money) on a recovery may make some sense. The economy may recover thanks to Captain Ben’s expert piloting skills. But for Americans to bet on the reflation experiment now underway by putting their financial future at stake is reckless in the extreme.
Captain Ben hasn’t proved to be a particularly good pilot in the past. After all, he flew into the recent financial storm completely unaware of the damage it would cause his fragile craft.