Abandon the assumption of continuity: Retirement funding update

I’ve been writing this blog for two months now and studying this crisis since last fall. I’ve come to believe one of the hardest things to do is to “abandon the assumption of continuity” (a handy phrase I got from Emer Dooley at UW’s Foster School of Business). Since WWII, we haven’t had a really life-interrupting national crisis in the US for comparison.

Accordingly, many of my posts concern our new economic realities — economic climate change. My intent is not gloom and doom, but to analyze the turbulence from which new opportunity and new market conditions flow.

Here’s one of those items that might be an “opportunity disguised as an insurmountable problem.” Baseline Scenario continues their outstanding reporting: this time with a post linking to a Bloomberg article on retirement funding:

I’ve been wondering why the impact of the financial crisis on the overall retirement “system” hasn’t gotten more attention in the media. We already knew the system was in bad shape before September 2008. According to the Fed’s Survey of Consumer Finances, in 2007, only 60.9% of households where the head of household was age 55-64 had retirement accounts . . . and their median retirement balance was $98,000. Given that the stock market has fallen by over 50% from its October 2007 peak – and that, for decades, the standard investment advice has been that stocks do better than any other asset class in the long term – we would be lucky if that median balance were more than $70,000 today.

The Bloomberg article linked to above describes the fragile state of state and local pension systems. These systems suffer from two major problems today. One is that even if they had been managed in a reasonable way, the fall in asset prices over the last year would have blown a huge hole in their long-term solvency.

The challenge with big national problems like these is how to scale them down so local small and mid-size enterprises can respond. Where are the associated opportunities for local banks, consultants, real estate developers, etc? I see two general thrusts. First, our public sector institutions are going to need deep reinvention: a whole new way of doing the public’s business. When government, education, and health care are the only sectors in the economy that are growing, you know we’re in a bind!

Second, we’re going to invent a “just enough” retirement lifestyle — ways for underfunded seniors to live as lightly and affordably as possible. The typical  retirement development today is a capital sinkhole modeled on a suburban mentality. Due to financial necessity, I predict a major senior wave into cities where they can leverage public transportation and civic assets.

Topics: Economy, Middle class, Opportunity