June 24, 2012

A generation lost

The median American household’s wealth has fallen by 40 percent over the last four years, and is now at the same level as it was 20 years ago at the end of the last significant recession. Median workers aged 35 to 44 have lost almost 60 percent of their wealth. However, not all have suffered equally.

Our wealth takes a variety of forms. The largest component for many households is the value of their home. In this great recession, home prices have dropped by an unprecedented amount.

The second largest component is in our pensions or retirement savings plans. Most of those who save through defined contribution plans, like 401k or 403b accounts, have lost, first in the crash of 2008 and, more recently, in the Euro crisis-driven crash of 2012.

Most working Americans are also eligible for Social Security. Few young people believe it will be there for them. The global crisis and increased longevity have jeopardized this latent form of wealth. The Social Security system is expected to be broke in 23 years, well before the time 35 to 44 year olds retire.

Those who have employer-based defined-benefits packages, mostly employed by various levels of government, have been protected from recent declines. However, their plans are indemnified by taxpayers.

Congress has enabled a government agency to regulate private and public pensions. Sponsoring companies must be prepared to cover their private pensions for any shortfall in their pension fund return below about 4 percent. Using this figure, the top 100 private pensions are probably underfunded by about $200 billion. The sponsoring corporations are on the hook.

Public-pension managers are permitted to assume an unrealistically high 8 percent future investment return. The auditors of these pensions also make overly optimistic assumptions on our lifespan. If we die earlier, the public pensions are more sound. If medical advances allow us to live longer, or if gold-plated medical plans prolong life, public-pension managers underestimate their liabilities. Most public pensions are dramatically underfunded in reality, with 34 states underfunded by at least 20 percent.

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