Sunday, January 4, 2015

Why many Boomers may not be prepared for retirement Part One

I get tired of reading about the need to raise the retirement age as is being done in Australia, Canada and other countries. The reason given by the advocates is that Boomers did not prepare for retirement or statements such as this one which claim it is not fair to Workers under 45 who have spent their lives paying-as-they-go for education and health and over-paying for property. It is not fair or sustainable to ask these generations to fund their larger parent generations through an endless retirement. This statement of course is Bullsh*t and is part of the need to simplify a very complex problem in order to win votes or advocate a position that is not justified based on economic facts.

The following speaks to the reasons boomers are in trouble.  Cynics blame Boomers for their excesses, their self-absorption and failure to plan wisely for the inevitable consequences of aging. As accusers lambaste, this country has too many overleveraged people in middle age, racking up credit card debt and at the threshold of insolvency, a massive retirement planning malfunction.  

Some dire warnings estimate that at least one-third of the generation may be financially unprepared for retirement. 

However, closer examination of sociological and demographic factors reveals other issues contributing to why many Boomers may be or feel that they are inadequately prepared for retirement.

One interesting factor is that from the time the Boomers entered the job market to now this generation has experienced 7 major recessions (a recession, is "a significant decline in economic activity spread across the economy, lasting more than a few months) before the great recession of 2007. Each recession had a major impact on Boomers and their ability to save. People who want to raise the retirement age or reduce pension payouts tend to forget history.

In the 1980s and 1990s recessions, unemployment rose sharply – by close to two million people during the former, and around one million people in the latter. These increases eclipsed those in the 1970s. This was probably because back then powerful unions and legislation made it more difficult to get rid of workers when output collapsed. Here is a review of the recessions (from Investomedia), Boomers went through over our working careers,

1. The "Rolling Adjustment" Recession: (April 1960 - February 1961)
Duration: 10 months
GDP Decline: 2.4
Unemployment Rate: 6.9%
Reasons and Causes: This recession was also known as the "rolling adjustment" for many major U.S. industries, including the automotive industry. Americans shifted to buying compact and often foreign-made cars and industry drew down inventories.Gross national product (GNP) and product demand declined.

2.The Nixon Recession: (December 1969 - November 1970)

Duration: 11 months
GDP Decline: 0.8
Unemployment Rate: 5.5%
Reasons and Causes: Increasing inflation caused the government to employ a very restrictive monetary policy. The structure of government expenditures added to thecontraction in economic activity.

3.The Oil Crisis Recession: (November 1973 - March 1975) 

Duration: 16 months
GDP Decline: 3.6
Unemployment Rate: 8.8%
Reasons and Causes: This long, deep recession was brought on by the quadrupling of oil prices and high government spending on the Vietnam War. This led to "stagflation" and high unemployment. Unemployment finally reached 9% in May of 1975. 

4. The Energy Crisis Recession: (January 1980 - July 1980) 

Duration: 6 months
GDP decline: 1.1%
Unemployment Rate: 7.8%
Reasons and Causes: Inflation had reached 13.5% and the Federal Reserve raised interest rates and slowed money supply growth, which slowed the economy and caused unemployment to rise. Energy prices and supply were put at risk causing a confidence crisis as well as inflation.

5. The Iran/Energy Crisis Recession: (July 1981 - November 1982)

Duration: 16 months.
GDP decline: 3.6%
Unemployment Rate: 10.8%
Reasons and Causes: This long and deep recession was caused by the regime change in Iran; the world's second largest producer of oil at the time, the country came to regard the U.S. as a supporter of its ousted regime. The "New" Iran exported oil at inconsistent intervals and at lower volumes, forcing prices higher. The U.S. government enforced a tighter monetary policy to control rampant inflation, which had been carried over from the previous two oil and energy crises. The prime ratereached 21.5% in 1982.

6. The Gulf War Recession: (July 1990 - March 1991)

Duration: 8 months
GDP Decline: 1.5
Unemployment Rate: 6.8%
Reasons and causes: Iraq invaded Kuwait. This resulted in a spike in the price of oil in 1990, which caused manufacturing trade sales to decline. This was combined with the impact of manufacturing being moving offshore as the provisions of North American Free Trade Agreement (NAFTA) kicked in. The leveraged buyout of United Airlines triggered a stock market crash.

7. The 9/11 Recession: (March 2001 - November 2001) 

Duration: 8 months
GDP Decline: 0.3
Unemployment Rate: 5.5%
Reasons and Causes: The collapse of the dotcom bubble, the 9/11 attacks and a series of accounting scandals at major U.S. corporations contributed to this relatively mild contraction of the U.S. economy. In the next few months, GDP recovered to its former level. (For more information, read Crashes: The Dotcom Crash.)

8  Great Recession

Duration  Two Years Dec 2007 – June 2009
GDP Decline  4.3%
Unemployment rate 10%

Reasons and Causes: The sub-prime mortgage crisis led to the collapse of the United States housing bubble. Falling housing-related assets contributed to a global financial crisis, even as oil and food prices soared. The crisis led to the failure or collapse of many of the United States' largest financial institutions: Bear Stearns, Fannie Mae,Freddie Mac, Lehman Brothers, Citi Bank and AIG, as well as a crisis in the automobile industry. The government responded with an unprecedented$700 billion bank bailout and $787 billion fiscal stimulus package. The National Bureau of Economic Research declared the end of this recession over a year after the end date.The Dow Jones Industrial Average (Dow) finally reached its lowest point on March 9, 2009.

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