Viva La Housing Society: Social Security, Savings and Debt, and Retirement.

John McCain has just given the US public a crash course on why debt is not a good thing. McCain raised $11.2 million this past quarter but spent most of it and has very little cash on hand. Seems rather commonplace for many Americans to spend more than they earn. Not only that, the major issues that we should be discussing such as the credit bubble, declining dollar, Social Security, and international conflicts are nowhere to be found in the mainstream political debate. Why isn’t any politician tackling any of these problems head on and discussing them? The only person I’ve heard mention “inflation” is Ron Paul, who by the way is financially better off than Mccain. Maybe basic finance does help those in politics. Either way, I think most Americans are realizing that being able to purchase something on cheap credit does not equal financial independence. On the contrary, many are realizing crippling debt is like jumping into the ocean with an albatross around your neck.

So we close off the first two quarters of the year with the fuse inching along to the dynamite box full of funky credit and Wall Street collateralized debt obligations that are so complicated, even the people that created them have no idea how to untangle them. The big bang is here and the world is realizing and watching morbidly, that we spent way beyond our means. In this article I will discuss three main issues that will impact the entire country. From young professionals starting their career to those in retirement. This credit bubble discriminated against no one. If you wanted a home equity line of credit, you were welcomed. If you wanted a no money down interest only loan, come on in. This bubble is one for the ages and we are starting to see that the public is starting to get the memo that massive credit is not a solid solution for sustainable growth.

Social Security – Shhh! Please be Quite

It has been argued that Social Security is the third rail of politics. We remember Al Gore and his lock box talk. Or Bush and his goal of privatizing Social Security. Both went down in mad Ghostrider flames. Yet the issue still looms. Even Clinton recognized the issue with Social Security but no political will was willing to attack the problem. The buck has now passed from three presidents onto another one that will inherit the problem in 2008. Every expert acknowledges that we have a looming problem with Social Security. But anytime a politician brings up the issue, it gets shot down. Typical of the housing bubble, Social Security is a ponzi scheme heading down a slow but sure road of insolvency.

For one, 44 million Americans depend on Social Security (so guess how they'll vote). Two thirds of senior citizens depend on Social Security as their main source of income. 18 percent of senior citizens rely on Social Security as their only source of income. Income that pays for food and housing cost. Keep in mind, even if you have your home paid off you will still get yearly tax bills. You will also need housing insurance and maintenance costs factored in. Why do you think many senior citizens are victims to reverse mortgage loans that are so financially egregious, you would think that you were dealing with a local bookie or turf accountant.

In 1960, there were 5.1 workers putting in money to the system for each person drawing on benefits. In 2005, the number dwindled to 3.3 workers. The projected number for 2031 is 2.1 workers for each person drawing on Social Security benefits. Why the sudden shift? Well we can thank a population boom phenomenon otherwise known as the baby boomers.

Baby boomers are considered to be folks born from 1945 – 1964. The total number of births during this time is somewhere in the ballpark of 76 million. Currently they are 20 percent of the adult population. An incredibly large number. The term is normally given to those in the age bracket of 44 to 62. The major shift will start occurring in 2008 when we start seeing baby boomers go into full retirement. The system is solvent until 2018, which at the time more will be paid out than paid into the system. By 2042 the system will be dry. So anyone in the 20 to 39 age range needs to start planning for another venue of retirement benefits since the last three presidents didn’t do squat regarding the issue.

With a high cost of living, mounting credit card debt, ridiculous college costs, and entry level salaries how is it possible for young professionals to realize the dream of their parents? Hard work and savings are paramount. But the way mom and dad did it is not going to apply to this generation since the Social Security safety net won’t be there for many and housing costs are much larger in proportion to those a generation ago.

Savings and Debt – How does it Break Down?

I’ve been clipping a few charts from the previous LA Times with fascinating data. After reading how Kobe is still up to his antics with the LA Lakers and David Beckham’s Galaxy salary is larger than many third world country’s gross domestic product, I enjoy heading over to the business section. The numbers are startling and the picture that is painted is that young folks of today consume at a high pace and save very little for retirement. It could be a generational thing where many of us are more comfortable paying with a credit card rather than cold hard cash. This debt mentality is also a contributing factor for the housing bubble. After all, a generation raised at the teat of debt is easily coerced into further spending. Large mortgages didn’t phase many young professionals. I’ve had a close friend purchase a Real Home of Genius condo with his wife for half a million dollars in a regular suburb of Orange County. The condo is slightly over 1,000 square feet and as cookie cutter as they come. Their combined income barely allows them to cover the mortgage, taxes, and association fees but they are following the lead of mom and dad. The only caveat is, mom and dad bought with 10, 15, or 20 percent down and went 30 year fixed. But the need to own a home is so psychologically ingrained that folks are willing to live on Cup-o-Noodles to pay the mortgage.

Let us take a look below at some raw numbers:

Average amount in bank accounts per household
20-29	$15,724
30-39	$22,561
40-49	$29,048
50-59	$43,194
60-69	$63,008
70-79	$70,031
80+	$93,641
Overall	$37,675

This first table looks at average amounts in bank accounts per household. Keep in mind that with averages, a person with $200,000 in the bank will skew the chart higher. But even with that considered, the amount of money in accounts isn’t that high. You may say, “well of course not, these people have them in 401(k)s and retirement accounts.” I’ll get to that in the next section but suffice it to say that folks aren’t really saving elsewhere.

The next chart looks at household debt from the same sample in the survey of 158,000 US households:

Average debt per household, including mortgagages
20-29	$62,786
30-39	$107,525
40-49	$106,027
50-59	$94,224
60-69	$79,493
70-79	$59,358
80+	$47,168
Overall	$90,222

This chart should put a major hole in many housing pundit theories of Americans being okay with large mortgage debt. The above chart includes revolving debt and mortgage debt. The highest average is in the 30 to 39 category and it tops out at $107,525. Now think about a young professional couple buying a starter home of $500,000 with 20 percent down. They’ve taken on $400,000 in debt. Or 4 times the average overall debt of those in the 30 to 39 and 40 to 49 group range.

Another scary factor is many of those hitting retirement are still in debt. As we’ve mentioned, if you are relying solely on Social Security as your main retirement income or a large part of it, $50,000 in debt is a large chunk of change.

Retirement

It is pretty clear that anyone in the 20 to 39 age bracket will need to fund their own retirement and not depend on Social Security. So how are folks doing?

Percentage of households with 401(k) plans
20-29	39.1%
30-39	52.3%
40-49	50.5%
50-59	47.7%
60-69	32.9%
70-79	20.3%
80+	18.6%
Overall	43.80%

Well there goes the argument that the majority of people are funding their 401(k). The 20 to 29 year olds are the one’s who need to fund their 401(k) accounts most aggressively. Those in the 30 to 39 age range seem to be getting the message that Social Security will not be there for them. Is fear of no Social Security the only reason for this shift? We have another reason:

Percentage of households with pension plans
20-29	8.1%
30-39	14.1%
40-49	19.1%
50-59	26.5%
60-69	33.7%
70-79	35.2%
80+	34.9%
Overall	21.50%

Pension plans are going the way of the Dodo bird. Anyone under the age of 40 is most likely to be at the tail end of a generational ending of pension plans. You can see from the numbers above that only 8 percent of household in the 20 to 29 range have pension plans and 14 percent of those in the 30 to 39 age range. If anything, these charts should show you that we are not in the world of our parents.

Let us not even dive into the declining dollar, massive deficits, and the ridiculous shadow government tactics used to calculate inflation. This all ties into the housing bubble because with such a high cost of living and lack of future planning, many young professionals seem to indicate by their buying habits a “screw the future” and live a carpe diem type lifestyle. To keep up with the dream of being equally as successful as their parents, they are mortgaging their present lifestyle to meet a dream that is no longer available. They chase this dream by diving into credit and hyping the monthly payments. Yet this is unsustainable. At which point will folks in the 20 to 39 age range become furious about paying into a system that they will not benefit from? At what point will they realize that inflation numbers are cooked and demand better accounting practices?

Sometimes it seems that the media is trying to create a generation of zombies that will stay away from picking up a book and educating themselves about the true state of affairs. According to A.C. Nielsen Co., Americans watch an average of 4 hours of television a day! Mortgage ads spouting crack pot numbers. Flip this House. Extreme Home Makeover. And all the other housing related shows seem to be the number one source for where people get their housing information. In addition we get this mantra of easy monthly payments and the advent of gorilla marketing making it seem like using cash is for old folks. The credit card commercials tell you two things; the faster you spend the better and don’t be uncool and use cash. God help us if people are using the television to educate themselves regarding the credit bubble, savings, debt, and retirement.

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