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Into The Abyss: Millions Face Old-Age With No Savings

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It was probably pretty obvious but there is a damning report out yesterday that paints a stark picture: the collapse of the housing bubble has created a savings and retirement crisis for millions of Americans who face a bleak future.

The report (which you can get here) comes from the folks at the Center for Economic and Policy Research (CEPR). Why should you believe it? If the policy wonks, talking heads, politicians, economists and the rest of the people who ignored the housing bubble's expansion had listened early on to CEPR's Dean Baker, one of the co-authors of the current report, we might likely have been able to act to prevent the bubble's inflation and save the implosion of the financial markets.

Baker was one of the few voices warning of the dangers of the housing bubble--but, back then, the traditional media had no interest in sounding like a downer in the go-go enthusiasm for the torrent of cash unleashed by over-inflated home values, and few political leaders wanted to "talk down" the housing value "boom" because, in some respects, it gave cover to the grim reality that no one was seriously dealing with the assault on peoples' wages and standard of living by corporate America. And bankers like Robert Rubin, who inexplicably still maintains his perch as economic statesman in the Democratic Party, were happy to inflate the bubble because their financial institutions were, in theory, building huge holdings (well, we know how that turned out).

So, what do we learn now from CEPR? Baker and his co-author, David Rosnick, looked at three scenarios: real housing prices remain at current levels, real house prices fall by an additional 10 percent, or real house prices fall by an additional 20 percent. The first scenario is highly optimistic--no one seriously believes housing prices will not fall further. Either way:

In all three scenarios, the vast majority of these families will have little or no housing wealth in 2009.

And because people made assumptions based on housing wealth:

...tens of millions of families likely ended up saving less than they would have considered prudent, had they recognized that their wealth was temporarily inflated by bubbles in the stock or housing market.

Now, some scolds will wag their fingers at people who did not save more money. But, the fact is the lack of substantial wage growth, the rising cost of health care, the rising cost of caring for elderly parents, the rising cost of school tuition, the rising cost of food and other necessities, and the lack of real pensions (more on that in a moment) made it impossible for most people not in the upper income brackets to save. (note to ABC's Charles Gibson: we are not talking about people making $250,000 a year)

CEPR's study is devastating:

The huge increases in house prices seen during the boom years, followed by the bust of the last two years effectively, took homeowners on a gigantic roller coaster ride. While many homeowners were far wealthier than they could have anticipated at the peak of the bubble, now that the bubble has largely deflated, they find themselves with much less wealth than they expected at this point in their careers.

Unfortunately, they do not have the option to reverse the saving and consumption decisions made in prior years. Older homeowners in particular will have little opportunity to make up for years in which they saved little, or not at all, under the assumption that the wealth in their home would be enduring and possibly increase further as house prices rose even higher.

The decline in house prices since the middle of 2006 has lead to the loss of more than $4 trillion in real housing wealth, more than $50,000 for every homeowner in the country. Real house prices are now dropping at close to a 2.0 percent monthly rate, which translates into a loss of almost $350 billion every month.[emphasis added]

Wanna know what that means by age group, assuming the relatively modest scenario that housing prices will drop 10 percent more:

If you are in a relatively young household--that would be 35-44 years old--the CEPR folks figure you will have in 2009 just $31,300 in wealth.

"This is 63.2 percent less than the wealth held by the median family in 2001 and 44.8 percent less than the wealth of the median family in 1989, twenty years earlier."

If you happen to be 45-54,

"the fall in housing prices is projected to lead to a reduction in wealth of 34.6 percent in 2009 compared to the 2004 level for the median family in this age group."

And if you are in the 55-64 age range, egads:

Median wealth is projected to drop from $275,400 in 2004 to $138,700 in 2009, a decline of 43.1 percent. While the median wealth in this age group is still projected to be 56.6 percent above its 1989 level, much of this gain would be eliminated if the decline in defined benefit pensions was included in the analysis.

Which leads to an important point. As the authors point out, in some respect their study understates the crisis facing most people. If we had a real pension system in the country, things would not be so scary. By real, I do not mean a 401(k), which is a phony pension. By real, I mean a defined benefit pension system that provides security for the vast majority of people who do not gamble in the stock market: a pension that you can count on delivering a secure amount of money to you each month.

Thanks to the screw-you-once-we've-used-you-up philosophy in corporate executive suites, since 1978, the number of defined-benefit plans plummeted from 128,041 plans covering some 41 percent of private-sector workers to only 26,000 today, according to the independent Employee Benefit Research Institute. The Bureau of Labor Statistics estimates that only 21 percent of workers in the private sector have defined-benefit pensions. In 2005, only 55 percent of full-time and part-time private sector workers worked at firms that sponsored a retirement plan. Of those, only 45 percent participated in an employer-sponsored plan. This compares with a 60 percent employer sponsorship rate and 50 percent employee participation rate in 2000.

And, by the way, the pension crisis you often read out about is not the fault of average working Joes and Janes. As I pointed out sometime ago, General Motors, General Electric, Bell South, Exxon, IBM, Bank of America, Pfizer and many big corporations have pension funding problems because of executive pensions, not rank-and-file workers' pensions.

For those of you who think that the stock market will make up the wealth loss, think again:

While stock ownership has become far more widespread over the last two decades, it is still the case that the vast majority of families own little or no stock, even when including holdings of mutual funds through defined contribution retirement plans.

There is a silver lining, sort of. The housing bubble collapse and the destruction of wealth makes it crystal clear why we have to move boldly to protect and strengthen Medicare and Social Security. And revive the idea that real pensions are not a luxury or a benefit that corporate executives can decide to toss aside but a right in a civilized society.