Money Perspectives with Professor Robert Johnson
Anyone who's taken a glance at today's savings and money market rates knows that soon-to-be retirees face some unprecedented obstacles in planning their retirement. To cast more light on this issues, Robert Johnson, Ph.D., professor of finance at the Heider College of Business at Creighton University in Omaha, Neb., offered these insights in a recent email interview.
MoneyRates.com: What should the government do to encourage Americans to save more for retirement – or should it even bother?
Johnson: The government really has two choices – either allow citizens to suffer the consequences of their own saving behavior (or lack thereof) or encourage them to save. I don’t believe that having citizens suffer the consequences of a lack of savings is politically palatable. If people don’t save enough for retirement, the government will be forced to serve as the “safety net” for these individuals. This will result in expenditures increasing on entitlement programs and will put further pressure on U.S. government budgets. Tax rates will likely rise and economic growth would likely be stunted.
The lack of retirement savings is a crisis of epidemic proportions, and the consequences will be realized in the coming years. It is, in my opinion, fueled by an abject lack of financial literacy in the average U.S. citizen. These kinds of life skills need to be taught early – in high schools. A majority of Americans have no idea about how much money they are going to need to be able to fund a comfortable retirement and many are so overwhelmed by the prospect that they simply ignore the need as it is so far in the future for many of them. When people face reality and begin to plan for retirement, it is often too late as time is no longer their ally. Even those individuals who are diligently saving for retirement often underestimate just how much they will need in order to fund their retirement. For instance, most people overestimate the spending rate on their savings – that is, how much they could withdraw in any year. A withdrawal rate in the neighborhood of 3.5 to 4 percent annually is what most financial planners would advocate.
Longevity risk – that is, outliving your assets – is a major problem. The average 65-year-old male has a life expectancy of another 20 years. And, that is simply an average. One needs to plan for a much longer lifespan, as running out of retirement funds is not a pleasant option. And, of course, opportunities are limited for older individuals to earn income to make up for their lack of retirement savings.
How might the retirement of the baby boomers impact the economy?
The two most basic economic effects of a generation of productive workers becoming pure consumers are that 1) labor supply will decrease (causing labor markets to tighten); and (2) consumption and demand for goods and services (relative to production) will increase. Excess supply in the labor market may pick up most of the former, but both are inflationary influences.
Overall economic growth will likely decrease as the supply of labor decreases. To make up for this potential shortage in the labor force, businesses with have to achieve a combination of the following (1) retaining some senior workers, (2) utilizing immigrant labor, or (3) outsourcing production. The retirement of baby boomers should also increase opportunities for younger members of the labor force and lead to falling youth unemployment rates.
The large influx of baby boomers will also impact certain sectors of the economy – particularly health care and related industries. Separate from the Affordable Care Act, the percentage of GDP spent on health care will rise dramatically as the population ages and demand for health care increases.
MoneyRates estimates that Fed policy has cost U.S. savers more than half a trillion dollars. Have the Fed’s low-rate policies been worth the lost income to retirees and other savers?
The cost of an easy-money policy to U.S. savers really tells only a small part of the story. An often overlooked part of the “cost” of Fed policy to U.S. savers is the impact of these policies on asset values generally. Stocks are at all-time highs and real estate is bouncing back in a very low inflationary environment. These obviously provide tremendous benefits for investors.
Lost interest – or more accurately, foregone interest – is only part of what should be considered in terms of the ultimate cost to U.S. savers. The more telling effect is the tremendous wealth transfer from savers to borrowers. There are a couple of facets to this effect. First, what you really have in this artificially low interest rate environment is subsidized debt for borrowers. Secondly, the boost in asset prices creates another cost for investors in the form of higher taxes on assets that have appreciated in price and are sold at a gain.