The Progressive Ensign

insights and analytics to build an economy that works for all

Category: Consumer Squeeze

15 Million Retiring Americans Face A Declining Standard of Living

Photo: pbs.org

The grand plan by financial services companies thirty years ago was to have Baby Boomers invest in 401k matching plans offered by their employer to build a secure retirement nest egg.  The 401k plan funds would be invested in the stock market. Companies would eliminate their defined benefit pension plans thereby reducing their retiree costs and transfer the savings responsibility onto the worker. The reality is that worker saving just never happened.  Since 1970, 90 % of pensions have been replaced by 401k or IRA plans. Unfortunately, many Americans raided these plans to pay for living expenses during the Great Recession

A Wall Street Journal analysis showed that 40 % of all households headed by people aged 59 -70 lack sufficient financial resources to maintain their standard of living during retirement. The situation is due in part to lack of saving in 401k plans and general savings.

Sources: Center for Retirement Research at Boston College, The Wall Street Journal – 6/22/18

Adding to the savings challenge, over the past 10 years incomes have stagnated making it extremely difficult for workers to put away more money into their 401k or savings plans.

Sources: Urban Institute analysis of Census Bureau data, The Wall Street Journal – 6/22/18

Consumer debt has soared for auto and student loans, further squeezing their ability to save. The combination of being left on their own to manage their retirement savings, limited matching from corporations not matching pension income streams and debt means that households are not saving enough to maintain their standard of living.

Sources: Center for Retirement Research at Boston College, The Wall Street Journal – 6/22/18

The situation defaults to retirees relying on government sources completely for retirement income, working longer than they had planned or gaining assistance from children.  While, funding help from children may work for temporary bridge loans, ongoing assistance will hurt their children’s ability to save as well, causing a snowballing effect on future saving.

Next Steps:

 From our previous analysis on the retirement crisis:

 Our politicians have designed a failure prone retirement system allowing corporations off the hook providing full defined benefit pension programs with professional management. Instead, 401k employee and employer match defined contribution programs were created where the individual is responsible for investing retirement funds safely. The present retirement program is a patchwork of 401ks, IRAs, Roth IRAs and SEP programs for small business. “

We continue to see many retirees at or below the poverty level:

“Today, Social Security only provides a $12,000 a year benefit to the average retiree. Yet, Social Security provides 80 % of the benefits that 40 % all retired people depend on.  A Retirement Savings Account would have as a core principle that the combination of Social Security and worker’s savings provide at least a guaranteed income at the poverty level at age 65.”

Social Security income is particularly difficult for women who made less income working. In 2014 women received on average $4,500 less per year than men in retirement.

Our recommendation is for a single Retirement Savings Account:

“Funds deposited by workers into their Retirement Savings Account would be tax deferred up to $40,000 per year until age 65 similar to a traditional 401k today.  Most workers will see a lower tax rate at retirement as this provision allows for lowering the cost of saving for retirement during high salary tax years. Corporations contributing to a workers’ Retirement Savings Account would be allowed up to a 50 % corporate tax deduction on the matching dollar amount to incent companies to contribute.

There would be no cap on total funds added to the Retirement Account by a worker.  Workers would be allowed to obtain a medical or education loan with their retirement account as collateral but only up to 10 % of the value, which if defaulted and not paid back, would be paid back on a pro-rated basis by a Social Security deduction beginning at age 65.

This Retirement Savings Account proposal meets 12 core principle requirements by the Retirement USA, a Washington D.C retirement advocacy group including: universal coverage, secure retirement, adequate income, shared responsibility, required contributions, pooled assets, payouts at retirement, lifetime payouts, portable benefits, voluntary savings, efficient and transparent administration and effective oversight.”

The crisis for our retirees continues to worsen as Congress does nothing to look at the root causes of the income challenge. We need to develop innovative solutions to make the golden years for our senior citizens secure now.

Tariffs Drive Price Increase of 17 % for Washers – Dryers As Predicted

 

Photo: wikipedia.org

When the GOP Administration decided to protect the US appliance industry by awarding tariffs of 20 % on imported washers and dryers we predicted that the price of washers and dryers would rise.  These appliances are basic to every household, with price rises hurting workers the most as they have seen their wages stagnant since the last recession. The three-month price increased for washing machines and dryers by 17 %. Ouuucch.

Sources: The Wall Street Journal, The Daily Shot – 6/18/18

From our blog on January 24 of this year:

“with a 20 % penalty on the first 1.2 million machines imported and a 50 % rate for any imports above that level.  A 50 % tariff was awarded on all washing machine parts imported – all penalties are for a three year period.  The administration is protecting Whirlpools’ market share of 43 %.  LG responded by announcing price increases up to $50 per machine or more.”

Since January, Whirlpool responded to LG price increases raising their prices as well. We observed then too:

“These tariff actions will hurt consumers by first raising prices on imported machines then Whirlpool will raise prices by virtue of increased market strength with competitors losing share.”

So, what happened, prices have zoomed up by 17 % on all laundry appliances. The highest prices since 2006, actually durable goods prices have been good news on the inflation front declining over the past 10 years since the recession.

Consumer Reports notes that both LG and Samsung are starting up plants in the US to build washers and dryers, with possible volumes to move shipments below the 1.2 million volume level where the tariff kicks in.  It remains to be seen how Whirlpool and the industry responds to prices on US built machines or will just keep prices high as long as the tariffs are in place.

Next Steps:

The Administration has had its time to perform an economic experiment on the American consumer, maybe it worked forcing Samsung and LG to startup plants in the US.  However, it may just act as a catalyst for all manufacturers to keep prices high while the tariffs are in place.   It’s time to examine in depth, understanding why US manufacturers are concerned about imports to answer the question if Whirlpool has 43 % market share why is it doing poorly?  Economic analysis is required by experts, not shoot from the hip policies to satisfy a minority political segment that will actually get hurt hardest when the layoffs in the Midwest start happening as sales fall.  The basic economic principle is that when prices rise demand falls – eventually.  This administration can’t defy this principle all it tries. Let’s understand what is really happening and develop a win-win plan for consumers, manufacturers and importers.

US Washer Manufacturers Raise Prices Due To Tariffs

 

Photo: consumerreports.org

As we predicted one result of import taxes (blog of January 24) the Administration placed on imported washers was that domestic suppliers would raise prices.  Sure enough they have raised prices by 7 – 15 % at a time when consumers are squeezed.  As tariffs were placed on imports we forecasted that domestic manufacturers would take advantage of the higher competition prices and raise their prices as Maytag and Whirlpool have done. Their spokesman say they had to raise prices due to increasing costs of steel and aluminum yet they have raised prices before the steel tariffs went into effect. Once again corporations lobbied government to change the rules in their favor to make more profits while consumers lose.

Other manufacturers for processed goods, food and items with a high shipping cost are raising prices as well.

Sources: Labor Department, The Wall Street Journal – 5/9/18

Of major concern is a combination of higher interest rates, tariffs and competition will cause increases in producer prices that companies will not be able to pass along to consumers. Consumers are too indebted to accept the price increases.  Margins are squeezed, companies lose sales, and a recession begins. Possibly the wealthy can continue to purchase major appliances and processed items but the middle class will not.

Next Steps –

The middle class is caught in the cross fire of competing interests in our economy where the Federal Reserve did keep interest rates artificially low increasing the value of financial assets like stocks, homes and consumers were able take on too much debt. The real assistance would be for the federal government to invest in jobs training, career development, Heartland regional economies, African American and Hispanic community development, welcome immigrants, and end stock buybacks.  Corporations could allocate the $1 trillion in cash they are holding in accounts mostly overseas and invest in their employees – raising their wages, productivity research, decent family leave programs and giving them more voice in corporate decision making.

Consumers Squeezed Between Debt and Stagnant Wages

 

Image: americanprogress.org

The Federal Reserve just reported that consumer debt related to auto and student loans are at the highest level they have ever been since 1970 (2nd chart).  As we have noted wages have stagnated since the Great Recession with 90 % of the income gains going to the top 10 % in income.  The middle class has been left out of the mainstream of the economic recovery over the past 10 years.

Sources: The Federal Reserve Bank – St. Louis, The Wall Street Journal, The Daily Shot – 5/8/18

While revolving debt from credit cards has fallen (top chart) since the recession, non revolving debt for autos and student loans has soared.   Consumers are caught in a squeeze between debt and flat wages.  The Commerce Department reported on 1st Quarter GDP noted that consumer spending had decelerated during the quarter.  Sentiment surveys have also shown a reduction in buying plans due to trade issues and any benefit from the tax cuts being lost due to rising prices from tariffs.  Banks have posted 7 straight months of an increasing percentage of charge offs on bad loans where consumers are not making payments on non-mortgage debt.

As interest rates go up, payments grow larger per month, with the added tightening of increased prices.  The middle class is caught trying to maintain their standard of living by borrowing money to mitigate flat wages.

Next Steps –

There are two sides to the squeeze – increasing wages and reducing loan payment size and principal.

We have endorsed Sen. Cory Booker’s bill called the Worker Dividend Act to share billions of dollars in stock buyback dollars 50/50 with employees.  We see a need for incentives for employers to share management extreme wealth now at 300 times average worker salary with the line staff.  Or if they can’t do it with incentives we like the City of Portland’s plan to require corporations share their funding above the 150 times level with employees. In our blog about why Wages Are Stuck we outline a series of steps including: placing workers on Boards, ending outsourcing overseas, end H1-B low wage visas, allow repatriated funds be brought back to the US only for wages, productivity or training investments, end stock buybacks and raise employee wages with the funds, breakup anti-competitive oligarchies of huge corporations to create more competition and jobs, balance the recruiting and hiring process for candidates, and offer incentives for employee training and development.

On the loan side, we recommend that student loan rates be brought back to reasonably fair rates as a percentage of the Fed Funds rate, and offer a series of forgiveness programs for universal service, community teaching and caregiving.  For auto loans, we request that the Consumer Finance Protection Bureau evaluate major bank auto loans to ensure they are fair and do not have hidden fees or unusual interest rate riders.

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