As a follow-up to our blog post from this morning on expanding U.S. deficits being good for future growth, my former Invesco colleague, Charles DuBois, has shared the following:

The WSJ is reporting today on a Congressional Budget Office (CBO) study indicating that this year’s budget deficit will be 43% greater than originally forecast.  Furthermore, future deficits beginning in 2020 will exceed $1 trillion per year.

According to the WSJ article, “economic growth will jump above 3% this year thanks to the fiscal stimulus, the CBO said, but the agency predicted the acceleration will prove largely fleeting. Larger deficits will add to the national debt: Debt held by the public will hit $28.7 trillion at the end of fiscal 2028, or 96.2% of the gross domestic product, up from 78% of GDP in 2018.”

“Such high and rising debt would have serious negative consequences for the budget and the nation; in particular, the likelihood of a fiscal crisis in the United States would increase,” CBO Director Keith Hall told reporters (as reported by the WSJ).

We disagree with Mr. Hall’s forecast that the benefit of the stimulus will be fleeting, believing that the additional fiscal boost will remain an economic catalyst well into the future provided that the additional demand for goods and services created from this deficit spend will be met by the economy’s ability to meet that demand.  If production can meet this heightened demand then we should witness above-average economic growth.  If not, then inflation will likely reappear in earnest.

One must remember that the Federal deficit is a liability of the U.S. government, but an asset of the private sector. Our economy (and citizens) has benefited tremendously from the Federal Government’s ability to deficit spend, especially during those periods when the private sector is incapable of stimulating growth.

There are many deniers within the U.S. retirement system that would have you believe that there isn’t a retirement crisis unfolding. The demise of the defined benefit plan has been most notable within the private sector, but multiemployer and public pension plans are certainly not immune to the problem, and the situation is likely to get worse before too long.

Let’s just take a look at the current environment within the multiemployer landscape:

• 130 multiemployer plans projected to be insolvent over the next 20 years (there are roughly 1,300 plans)
• 200 additional plans in PPA critical status (<65% funded)
• 3.5 million plan participants with pension benefits at risk
• PBGC financial exposure to multiemployer plans at $65 billion as of 2017
• PBGC multiemployer insurance program projected to be insolvent in 2025
• Even with a solvent PBGC their maximum guaranteed benefit still results in major benefit cuts to participants
• Multiemployer Pension Reform Act of 2014 (MPRA) has failed to arrest the multiemployer funding crisis

This situation is deeply concerning, but not impossible to overcome if we act now. As we’ve discussed on many occasions within this blog, Federal legislation (The Butch Lewis Act) is being considered that would provide low-interest loans to “Critical and Declining” status plans that would help protect the promised pension benefits for the millions of plan participants. Our failure to act will create profoundly negative social and economic implications.  This legislation needs to be enacted.

The following chart was extracted from an article from ReLab’s Backgrounder, The New School’s Schwartz Center For Economic Policy Analysis.

As one can clearly see, no near-retirement income group is in great shape when it comes to funding a retirement account, but the bottom 50% of older income earners are in terrible shape.

The move from defined benefit plans to defined contribution plans has crippled the lower income cohort. Why should we have expected any other outcome? Many of these near-retirees in the lower income category don’t have access to a retirement plan at all.  Furthermore, DC plans, as we and others have reported, are asking too much of untrained workers when it comes to funding, managing, and dispersing this retirement “benefit”.

REAL change is needed, and fast. Asking employees to work longer is not always in the cards, as employers frequently have a different objective. It is estimated by ReLab that 40% of the roughly 21.5 million older workers (ages 50-60) will be downwardly mobile upon retirement, with incomes <200% of the poverty level.  This is both shocking and shameful.

It doesn’t take a rocket scientist to understand the impact that this downward mobility will have on our consumer-driven economy.

On December 28th we posted a brief note discussing UBI Blockchain Internet Ltd, a Hong Kong based company.  Here is that note –

For the year, UBI had an operating loss of $1.83 million on zero revenues. It had $15,406 in cash, and: “In order to keep the company operational and fully reporting, management anticipates a burn rate of approximately $220,000 per month, pre and post-offering.”

Well, it seems like many investors were willing to pay a lot.  You see, UBI Blockchain Internet, a Hong Kong outfit whose shares trade in the US [UBIA] saw it’s stock price during the six trading days starting on December 11, 2017, soar over 1,100%, from $7.20 to $87 on December 18, as the word “blockchain” is in its name.  By December 21, shares had plunged 67% to $29. They closed on Wednesday at $38.50.

The above information was found in an article by Wolf Richter, who points out that UBI isn’t the only “scam” in town.  There has obviously been tremendous interest in all things crypto and blockchain in 2017, but how different is it from the hundreds, perhaps thousands, of dot-com companies that briefly appeared in the late ’90s with absurd stock market returns only to meet catastrophic destruction like supernovas?

We would suggest that you proceed with caution, but if you feel that you must gamble, please choose a “game” with better odds.

I hadn’t been following this stock since the note, but thought to check this morning.  Not to my surprise, the stock is currently trading at $4.00 per share having traded recently (3/23) at $3.00.  I’m sure that there are many such examples where investors have jumped on crypto and blockchain concept trades only to be burned bigtime. As we said above, “investors” should have learned from their experiences around the Dot-com era. Fundamentals do eventually matter!

The $1.3 trillion omnibus spending bill that was recently passed by Congress, unfortunately, allocated nothing for retirement provisions.  The Retirement Enhancement and Savings Act (RESA) was not included in the final draft of the spending bill, although industry supporters hoped it would be included. RESA offered a wide-ranging bipartisan package of reforms that actually passed the Senate Finance Committee in 2016. The bill was revived in the Senate in March 2018. Opposition to it came from the House because there wasn’t time for Representatives to offer their own changes to the bill before the spending bill was passed.

If eventually approved, RESA will not only make some improvements to the current system, but it may also provide access to workers who may not currently contribute to an employer-sponsored retirement plan. According to an article from The Hill, RESA passed on a bipartisan, unanimous basis by the Senate Finance Committee in 2016. It is designed to not only help Americans boost their savings but also provide a means to secure retirement income for life to supplement Social Security.

The reforms encourage retirement plan creation and increased savings at small businesses. This is absolutely vital since employees at the nation’s largest firms are much more likely to have access to a 401(k) plan than employees at small firms. According to the U.S. Census Bureau, the U.S. currently has 27.9 million small businesses versus only 18,500 companies with more than 500 employees.

One provision encourages small employers not yet prepared to sponsor their own retirement plans to join an “Open MEP,” a multi-employer plan, to achieve economies of scale and to share the costs associated with plan administration.

Fortunately, some provisions in RESA have been picked up in stand-alone bills, including offering nondiscrimination relief to closed pension plans, allowing multiple employer plans, and encouraging lifetime income options, i.e. annuities—the only product that can guarantee a lifetime stream of retirement income.

Much more needs to be done to help our workers save and prepare for a retirement. Getting RESA passed and funded is a good start.

We’ve reviewed many retirement surveys from numerous organizations, and regrettably, the common theme is a significant lack of retirement readiness. The chart above would suggest to us that only the top 10% of American households even stand a chance of having a decent retirement.  Notice, we didn’t say dignified.

As we recently reported, the average Senior citizen spends roughly $46,000 per annum in retirement. Since Social Security’s average payout is only about $16,000, this leaves a significant gap that must be closed through personal savings or a defined benefit payout.  Unfortunately, most private sector workers do not and will not have access to a DB plan.

Furthermore, it has been reported that one could expect to pay roughly $275,000 in out-of-pocket healthcare expenses during their Senior years. Only the top 10% have accumulated assets in excess of $200,000.

The folks in Washington DC better get serious about addressing this unfolding crisis before we have a significant percentage of our once very productive Senior citizens falling onto the welfare ranks.

According to an article on the 401K Specialist website, there are two important policy initiatives that could provide participants with low savings balances a retirement savings boost. The proposed initiatives deal with Auto Portability and missing participants, which we highlighted in a March 9, 2018, blog post. The policy efforts seem to have bi-partisan support (that’s almost shocking).

With regard to Auto Portability, the legislation is calling for the “routine, standardized, and automated movement of an inactive participant’s retirement account from a former employer’s retirement plan to their active account in a new employer’s plan.” This is critically important because of research that shows more than 50% of balances below $5,000 are more likely to be cashed out than moved to a new employer.

The total of “missing” accounts/participants is staggering.  We reported in a previous post that roughly 25 million abandoned accounts exist with approximately $8.5 trillion in assets. Finding the owners of these accounts will certainly go a long way to reducing the negative effects of low household savings. The Act proposes the creation of a national registry for participant contact information. The Social Security Administration and the Department of the Treasury are identified in the bill as responsible for the administration of the registry.

These initiatives should absolutely be supported.  Given that defined contribution plans are fast becoming the only retirement game, we must do whatever we can to make it easier for our workers/participants to accumulate retirement assets. As we know, too many of our workers (1 in 5 over 65 are still in the workforce) are facing the likelihood that retirement is not an option. Let’s try to reduce that percentage of workers forced to remain in the labor force and these legislative efforts will certainly assist in that effort.