Retirement crisis: From bad to worse

By Jim Jubak

Baby boomers and the post-boomer generations are facing a retirement crisis. And it now goes way beyond the worries about a collapse of Social Security that so preoccupied us before housing prices headed south.

The crisis I'm talking about is a result of economic and monetary policies that have turned a pattern of boom-bust-boom-bust into business as usual in the U.S. economy. The 2007-and-counting collapse of the housing, mortgage and debt markets isn't an isolated disaster but part of a decade-long shift away from saving and investing toward speculation and gambling with our future.

We don't have a whole lot of time to fix this crisis. The boomers born in 1946 will turn 65 in 2011. For many of us in the baby-boom generation, financing a relatively comfortable retirement, which never looked easy, looks increasingly impossible.

For those of you in the post-boomer generations, I'm sure it seems even more likely that we boomers will try to pick your pockets to finance our retirements. And I'm not sure that you're wrong to believe that. This crisis wouldn't be so bad -- and might not even exist -- if we hadn't dug ourselves such a deep hole to begin with and then kept on shoveling.

Pig in a python

That initial hole was largely demographic. The number of Americans 65 and older is projected to increase to 69.4 million in 2030 from 35.5 million in 2000, the Census Bureau says. That's not entirely bad news -- much of the increase comes from Americans living longer -- but it is a problem if you're trying to figure out how to pay for all those people to retire.

• Talk back: Are you worried about the worsening retirement crisis?

Because the baby-boom generation is so much bigger than succeeding generations, the ratio of people in the retirement years, 65 and older, to those in the working years, 20 to 64, will rise from 20.6% in 2005 to 35.5% in 2030, according to the Census Bureau. That will put a strain on any retirement system that depends on contributions from current workers, as Social Security does, to pay the benefits of current retirees.

Fortunately, Social Security is only one part of the stream of cash that we use to pay for retirement in the United States. Most of the other sources aren't based on funding current benefits from current contributions. They rely on current savings, invested over time, to produce a future sum sufficient to pay for retirement or part of it.

There are three big pieces to this saving and investing part of the retirement cash flow:

• Traditional pensions. With these, most of the saving and investing is done by employers, which also bear the risk that retirement assets will fall short of promised benefits. As of 2005, only 37% of workers were covered by a traditional pension, according to the Employee Benefit Research Institute. And a growing number of company pensions are winding up in the hands of the Pension Benefit Guaranty Corp., a government agency and payer of last resort that is underfunded to the tune of $14 billion, as I described in "The year's scariest investing news" on Feb. 26.

• Accounts funded by contributions from workers. These include 401(k)s and individual retirement accounts. The Employee Benefit Research Institute estimated workers had about $7.5 trillion in these retirement accounts as of October 2007.

• Home equity. For most people, the house they live in is their biggest retirement asset. In retirement, people cash in on the value of their homes by selling and then buying less expensive houses, renting or moving in with the kids. More people are also using reverse mortgages to extract equity from their homes in retirement. As of October, working from numbers published by the Federal Reserve and changes in home prices measured by the S&P/Case-Shiller index, I calculated a total value of about $20.7 trillion for the value of all U.S. residential real estate.

At this point in articles on this topic, it's customary to point to the money lost in the busts after the booms and, after much wringing of hands, conclude that all is lost. The absolute numbers are indeed impressive.

In the 2000-02 dot-com crash, market capitalization of the U.S. stock markets declined anywhere from $5 trillion to $9 trillion (depending on what indexes and markets you count, but what's $4 trillion among friends?). In a Feb. 28 conference call, mortgage buyer Fannie Mae (FNMN, news, msgs) said it expected the real-estate market to bottom in 2009 after a total drop of 15% to 20%. That would produce a loss of roughly $3 trillion to $4 trillion.

Biggest loss isn't dollars

But it's not the dollars lost that make me worry about a crisis. Market losses get recouped in market rallies. By July 2007, the Standard & Poor's 500 Index ($INX) had made up all the money it had lost in the bear market of 2000-02. The top estimate of $4 trillion lost in a housing bubble would just take home prices back to where they were in March 2004.

What we've lost that can't be replaced is time.

Continued: A financial nightmare for many

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