Sunday, January 20, 2013

The Fleecing of Old and Young

What would the media coverage be like if every person on Social Security saw their monthly income benefit cut by 80%?

What would the media coverage be like if scores and scores of senior citizens had to return to the workforce because their retirement income just wasn't there anymore because of the policies of our federal government?  In fact, this resulted in seniors actually taking jobs at the expense of younger workers.

If we saw this you would think we would see both senior and younger workers in full outrage about those government policies.  Seniors, who worked and saved their whole life, having the rug pulled out from under them just as they were looking to enjoy the promise of retirement security.  Younger Americans, who are looking forward to the future,  seeing the promise of a better life put in serious jeopardy by those policies.

In fact, all of this is occurring and yet we hear almost nothing about it on the news.  We see nothing changing insofar as our government policies.  And we see next to nothing from both young and old alike demanding change.

What am I talking about?

If you are a retiree and have any amount of savings, you know.  For others, let's look at what has happened over the last few years.

In 2007, a retiree (or any saver for that matter) could earn a decent yield on invested cash in money market, certificate of deposits or bonds.  Dennis Miller who writes a column called "Miller's Money Forever" explains how things have changed for that retiree.

Finding cash alternatives is one of the most important issues affecting us as investors. To help this make sense, let me begin at the beginning… the good old days of 2007, when most of us kept our cash in brokerage "sweeps" accounts.

Sweeps accounts automatically "swept" a portion of our brokerage account into an interest-bearing account so that our idle cash would provide some income. At that time, my Schwab sweeps account was paying 4% interest. To keep the math simple, imagine a person with a $150,000 portfolio who wanted to earn 10% overall – that's $15,000. If one-third of that portfolio ($50,000) were in cash, earning 4% interest, that's $2,000. That means that the other two-thirds of the portfolio has to earn $13,000, or 13%, on the remaining $100,000. That wasn't so outrageous in 2007.

Many conservative portfolios would take a portion of that remaining $100,000 and invest it in fixed-income instruments paying 6% or more. Even then, the remaining balance could be invested wisely to make for a 10% overall return with only a portion of the capital at any real risk.

Now fast forward to 2012. Today my sweeps account pays exactly 1/100th of 1%. That same $50,000 only earns $5.00 in interest annually. That means that the other two-thirds of the portfolio has to earn close to 15% to reach the same target of 10% overall… in a down economy. That's a tall order.

I want to really emphasize this point for all of our readers. In 2007, it took $50,000 to earn $2,000 in interest in our normal cash account. To earn the same $2,000 today, we would need $20 million in our sweeps account. (emphasis added)

In addition, back in the "good old days" part of the remaining two-thirds of a conservative portfolio would have been invested in CDs or top-quality bonds. What's happened to that portion? The best rate I can currently find for a five-year CD is 1.2%. Not only has the one-third cash allocation taken a huge hit, so has the portion that would have been safely invested in CDs and high-quality bonds.

Let's see how all of this has worked out for a retiree with a retirement investment portfolio of $500,000 that came from a lifetime of savings in their 401(k) plan.  Miller again does the math.

In 2007, before the government decided to clamp down on interest rates, you could invest that money in 6% CDs and earn $30,000 in interest. For decades almost all financial planning tools used 6% as a retirement benchmark.
Now, the best rate for a 5-year CD is 1.2% interest. The same CDs would earn $6,000 in interest. 
The interest does not even cover the government-reported 2% inflation. Add that $6,000 to your Social Security check and that is what you have to live on

If you are keeping score, that retiree's investment income has gone from $30,000 per year to $6,000 per year.  That is a loss of income of $24,000 per year-or a 80% reduction.  For an investor to earn the same safe income today would require an investment portfolio of $2,500,000!

Why has this happened?  Quite simply, the Federal Reserve has been on a mission since 2008 to bail out Wall Street and the bankers that made bad loans and the politicians in Washington and elsewhere who can't balance a budget (or in the case of the U.S. Senate, even pass a budget).

Retirees and savers have paid a horrible price.  And yet you hear almost nothing about what is close to theft by way of the low interest rate policy supported by the Federal Reserve and our Washington policy makers.

So what are those over age 55 and over doing about it?  Those at age 55 and older who are already working are not giving up their job.  They can see that their 401(k) balances will not earn very much in retirement.  For those who have already retired, many are going back to work.

Younger workers are paying the price.

Look at his chart of Job Additions Since July 2009 (the "End of the Recession") by Age Group that was put together by Zero Hedge back in November.  It shows that of the 3.3 million jobs that were "created", 3.8 million jobs went to workers age 55 and over.  All other age groups lost 500,000 jobs in total.  Workers in the youngest (ages 16-19) and prime (ages 25-54) cohorts lost 1.3 million jobs.



Workers aged 20-24 have gained jobs over the last three years but at only a fraction of those aged 55 and over.

This chart from Zero Hedge shows the job additions by age group in October, 2012.  This is  representative of what has been occurring over the course of 2012.


Bear in mind that the two charts above were as of October, 2012.  That was right be before the election.

Despite this, we know who the voters sent to Washington.  This is despite this clear evidence that both the old and young are being fleeced by the policies of the last four years.

Is the media completely asleep?

Are the people nothing but sheep?

Are all of our elected representative creeps?

When are we going to understand that our problems run very, very deep?

If we don't soon, there will be many more who will weep.

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