Monday, December 6, 2010

A scary thought. Your Income may need to increase a LOT during your retirement.

By Jeffrey A. Marshall

The 2010 Deficit Commission Report was politically dead on arrival at Congress.  The report (entitled “The Moment of Truth”) had the audacity to suggest that Americans need to engage in shared sacrifice through both cuts in spending and tax increases. 

Of course, the more liberal politicians in Washington are unlikely to ever accept spending cuts in programs like Social Security, and conservative politicians appear to be unable to accept tax increases of any sort.  Why embrace cutting benefits and subsidies and raising taxes if your polestar is getting re-elected in two years.  So, it looks like the “looming fiscal crisis” predicted by the Deficit Report will most likely come to pass.

“Spending is rising and revenues are falling short, requiring the government to borrow huge sums each year to make up the difference. We face staggering deficits. In 2010, federal spending was nearly 24 percent of Gross Domestic Product (GDP), the value of all goods and services produced in the economy. Only during World War II was federal spending a larger part of the economy. Tax revenues stood at 15 percent of GDP this year, the lowest level since 1950. The gap between spending and revenue – the budget deficit – was just under nine percent of GDP.

The common belief in Washington is that deficit reduction gridlock will result in our passing a financial doomsday on to our children and grandchildren.  As stated by the Deficit Commission: “America’s long-term fiscal gap is unsustainable and, if left unchecked, will see our children and grandchildren living in a poorer, weaker nation. In the words of Senator Tom Coburn, ‘We keep kicking the can down the road, and splashing the soup all over our grandchildren.’ Every modest sacrifice we refuse to make today only forces far greater sacrifices of hope and opportunity upon the next generation.”

But if you are a younger retiree, around age 65 like me, I think we are not just bequeathing financial crisis to our children – we are likely to live long enough to “enjoy” the doomsday ourselves during our remaining lifetimes.

We know that our overspending and under-taxing will ultimately translate into growing inflation. And inflation devastates retirees and others on fixed incomes.  If you are a younger retiree it is going high inflation is going to impact you.

In November 2010 the magazine Money published a short but scary article on the impact of even modest inflation on retirees. The article was written to answer a reader’s question – “what are the biggest issues new retirees tend to underestimate.”

Let’s say that you are age 65 and you just retired.  Perhaps you are proud to be living within your means – spending no more than your income. (If only the government could do that). It looks at first glance like you are on course to have your income and savings last your lifetime. The problem is, the cost of the things you need to buy will be rising over the next 20 years.  And, rising dramatically as government deficits grow and inflation accelerates.  Your income is going to have to go up as well. 

How much will your retirement income have to increase when inflation hits the things you buy?  The handy chart in the Money article gives you an idea. 


So, if you are age 65 like me, and inflation averages 5% over the next twenty years your income at age 85 will need to be 265% of your current income just to keep you even with inflation. Imagine how much your income will need to rise if the inflation rate exceeds 5%.

So, it seems to me that this deficit reduction business is not just a question of the morality of passing a lot of debt on to our children and grandchildren. New retirees - to paraphrase John Donne: Do not send to know whom the deficit bell tolls, it tolls for thee.


gary said...
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gary said...
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