Social Security

Getting the Message on Retirement Savings

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401(k) plan balances are actually increasing.
401(k) plan contributions -- and balances -- are back on the increase.
Have Americans finally gotten the message about saving for retirement? Judging from the most recent published stats on 401(k) savings, it would seem so.

Last month, it was reported that 401(k) retirement savings have hit a 12-year high, with an increase of ~3.5% in contributions being charted during the first quarter of 2011.

What about average account balances? Today, those stand at about $75,000. That’s still woefully inadequate considering what (little) people can expect to receive from Social Security as they reach retirement age. But it’s a darn sight better than the ~$41,000 average 401(k) plan balance that existed in 2002.

Of course, averages can be misleading, since the figures can be skewed by some very hefty balances held by a very few highly compensated workers at the top of the heap. In fact, more than 55% of workers have less than $25,000 in their 401(k) plans.

On top of that, nearly one in four plan participants has outstanding loans against their plans.

Clearly, the recession has had a big impact on contribution behavior – even as workers have become more sensitized than ever about the inability of Social Security to cover their retirement needs.

Making 401(k) contributions are not an option for the unemployed, of course, but there are many other workers who were forced to reduce their contributions to cover for losses of family income because of a spouse losing his or her employment.

And some have had to borrow against their plan assets in the more serious circumstances. Those loans are actually up by double digits.

Still, it’s heartening to see the latest numbers … as it appears that “awareness” is now being translated into “action.” Would that we could rely on our local and national politicians to do the same thing …

For U.S. Households, the $534,000 Elephant in the Room

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It doesn’t matter where you may be on the political spectrum, the most recent financial figures about the U.S. economy and our financial obligations have to be stunning in their import.

It turns out that the federal government’s financial condition has deteriorated much more rapidly and significantly than is commonly understood – far more than the ~1.5 trillion in new debt that was incurred to finance the budget deficit.

Instead, USA Today is reporting that the government took on some $5.3 trillion in new financial obligations during 2010. Not surprisingly, a big chunk of these unmet obligations fell under Medicare and Social Security.

Adding these new obligations to the existing ones translates into a record of nearly $62 trillion in financial promises not paid for.

And if that particular number isn’t striking enough, perhaps putting it this way will get your attention: It translates into ~$534,000 in unfunded obligations for each individual household in the United States.

In addition to $534,000 being a breathtaking number in and of itself, it represents more than five times what Americans have borrowed for everything else (mortgages, car loans, college loans, etc.).

Now there’s certainly a big difference between the government and the private sector, of course. Corporations would be required to account for these new liabilities when they are taken on – and thereby report big losses to their shareholders. But unlike businesses, Congress can conveniently stave off recording these commitments until it’s ready to write the check. “See no evil … hear no evil …”

And here’s another big difference between the federal government and everyone else: the ability to “manufacture” greenbacks to pay for debt obligations. Whether we call it euphemistically “quantitative easing” or more bluntly “printing money,” that’s a solution that comes dangerously close to the famous quip attributed to H. L. Mencken: “For every problem, there’s a solution that is simple, elegant, and wrong.”

Sheila Weinberg, founder of the Chicago-based Institute for Truth in Accounting advocacy organization, raises another key point: “The [federal] debt only tells us what the government owes to the public. It doesn’t take into account what’s owed to seniors, veterans and retired employees. Without accurate accounting, we can’t make good decisions.” She has a good point.

The blind leading the deaf: It certainly doesn’t portend well for the future. But there’s always the hope that if we can somehow create robust future annual economic performance in the 4-5% range, we’ll grow our way out of the problem.

We’ll have to see about that.

The End of Privacy

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An article by technology author Steve Lohr published last week in The New York Times caught my eye. Titled “How Privacy Vanishes Online,” it explores how conventional notions of “privacy” have become obsolete over the past several years as more people engage in cyber/social interaction and web e-commerce.

What’s happening is that seemingly innocuous bits of information are being collected, “read” and reassembled by computers to build a person’s identity without requiring direct access to the information.

In effect, technology has provided the tools whereby massive amounts of information can be collected and crunched to establish patterns and discern all sorts of “private” information.

The proliferation of activity on social networking sites such as Flickr, Facebook and LinkedIn is making it easier than ever to assemble profiles that are uncanny in their accuracy.

Pulling together disparate bits of information helps computers establish a “social signature” for an individual, which can then be used to determine any number of characteristics such as marital status, relationship status, names and ages of children, shopping habits, brand preferences, personal hobbies and other interests, favorite causes (controversial or not), charitable contributions, legal citations, and so on.

One of the more controversial experiments was conducted by MIT researchers last year, dubbed “Project Gaydar.” In a review of ~4,000 Facebook profiles, computers were able to use the information to predict male sexual preference with nearly 80% accuracy – even when no explicit declaration of sexual orientation was made on the profiles.

Others, however, have pointed to positive benefits of data mining and how it can benefit consumers. For instance, chain grocery stores can utilize data collected about product purchases made by people who use store loyalty cards, enabling the chains to provide shoppers relevant, valuable coupon offers for future visits.

Last year, media company Netflix awarded a substantial prize to a team of computer specialists who were able to develop software capabilities to analyze the movie rental behavior of ~500,000 Netflix subscribers … and significantly improve the predictive accuracy of product recommendations made to them.

To some, the Netflix program is hardly controversial. To others, it smacks of the “big brother” snooping that occurred in an earlier time during the Supreme Court confirmation hearings for Robert Bork and Clarence Thomas, when over-zealous Senate staffers got their hands on movie store rental records to determine what kind of fare was being watched by the nominees and their families.

Indeed, last week Netflix announced that it will not be moving forward with a subsequent similar initiative. (In all likelihood, this decision was influenced by pending private litigation more than any sort of altruism.)

Perhaps the most startling development on the privacy front comes courtesy of Carnegie Mellon University, where two researchers have run an experiment wherein they have been able to correctly predict the Social Security numbers for nearly 10% of everyone born between 1989 and 2003 – almost 5 million people.

How did they do it? They started by accessing publicly available information from various sources including social networking sites to collect two critical pieces of information: birthdate, plus city or state of birth. This enabled the researchers to determine the first three digits of each Social Security number, which then provided the baseline for running repeat cycles of statistical correlation and inference to “crack” the Social Security Administration’s proprietary number assignment system.

So as it turns out, it’s not enough anymore merely to be concerned about what you might have revealed in cyberspace on a self-indulgent MySpace page or in an ill-advised newsgroup post.

Social Security numbers … passwords … account numbers … financial data. Today, they’re all fair game.

Your declining retirement savings: It’s all relative.

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EBRI's Annual Retirement Confidence Survey
The EBRI's 2010 Retirement Confidence Survey reveals severe challenges faced by many American workers.
As difficult as the last two years have been on your finances, you’ve probably saved a lot more for retirement than your fellow workers.

How is that possible? Because it’s all relative. The Employee Benefit Research Institute’s most recent annual survey of U.S. workers and their retirement savings reveals that the percentage of workers having fewer than $10,000 in savings stands at 43%. That’s up from 39% in 2009.

Even more ominous, the percentage of workers who reported they have less than $1,000 in savings is 27% — significantly more than the 20% reported in 2009.

The EBRI’s definition of retirement savings excludes the value of primary homes and defined-benefit pension plans. Still, these are startling figures, showing that large numbers of Americans have little if anything in the way of a savings safety net.

It’s true that some people have plowed their savings into the purchase of a home. But these “house poor” individuals are often among the first who face mortgage foreclosures upon the loss of a job, because they have so few cash resources upon which to fall back.

If there is a glimmer of good news in these dreary statistics, it’s that more people are awakening to the reality of their finances. Gone is the notion that Social Security will pay enough for a decent retirement lifestyle. Indeed, less than 20% of respondents expressed confidence in their ability to save enough for a comfortable retirement. That’s the second lowest reading ever recorded in the 20-year history of the EBRI’s annual survey.

Only ~45% of workers with some form of savings have more than $25,000 stashed away … and people know that $25,000 is not nearly enough for retirement, Social Security payments being what they are. Consequently, in the 2010 EBRI survey, one in four workers report that they’ve decided to postpone their retirements (that’s up from ~15% saying so in the 2009 EBRI research).

For its survey, the Employee Benefit Research Institute queried ~1,150 U.S. workers (age 25 and older) plus retirees, making it one of the most comprehensive field studies on the topic of U.S. retirement savings. There’s a wealth of additional statistics and insights available here.