Europeans Unveil a View of the Future of Monetary and Fiscal Issues in Europe

The Europeans have issued a document ahead of the EU Summit that addresses the the consolidation of the European Economic and Monetary Union.  As you will notice below the document is patterned after a US/English style central bank and government regulatory system, but is altered to fit the multi-country environment in Europe.  

Article is in italics and bold is my emphasis.

The original document can be found at The European Council and is only 7 pages long.

The article is from the BBC:

European authorities have unveiled their vision for the future, which gives them much greater powers.

It includes the creation of a European treasury, which would have powers over national budgets.

European Commission President Jose Manuel Barroso said it was "a defining moment for European integration".

The document, released ahead of Thursday's EU summit, said greater fiscal union could lead to common debt being issued by eurozone countries.

There would also be banking union, with a single European banking regulator and a unified deposit guarantee scheme.

The document was released by European Council President Herman Van Rompuy and was drawn up with the presidents of the European Commission, the Eurogroup and the European Central Bank.

Mr Van Rompuy said it was "not meant to be a final blueprint", but that he expected "to reach a common understanding amongst us on the way forward" at Thursday and Friday's summit.

Mr Barroso said the guiding principle was that "greater solidarity and greater responsibility must go hand in hand".

Proposals in the report included:

• Limits on the amount of debt individual countries can take on
• Annual national budgets can be vetoed if they are likely to mean a country exceeding its debt limits
• The eurozone borrowing money collectively "could be explored"
• A European treasury office to be set up to control a central budget and keep an eye on national ones
• A single European banking regulator and a common scheme guaranteeing bank deposits
• Common policies on employment regulations and levels of taxation
• Joint decision-making with national parliaments to give it "democratic legitimacy".

Earlier, German Finance Minister Wolfgang Schaeuble also called for there to be a European finance minister, with the power to veto national budgets as well as an elected president of Europe.

French, German, Spanish and Italian finance ministers are meeting on Tuesday to discuss closer union.

French Finance Minister Pierre Moscovici has said Thursday's EU summit should, "lay the groundwork for the second phase of the euro".

Many governments outside the eurozone have called on it to issue eurobonds, which would be a way to allow countries that are currently unable to borrow money commercially to borrow at low interest rates.

But some countries, especially Germany, have resisted this step unless there is much closer fiscal union.

The reason for that is that eurobonds would have much the same effect as the original introduction of the euro, which is that they would allow many governments access to cheaper loans.

There is therefore concern that without European control over budgets, some countries would again take on unsustainable levels of debt.

One of the big changes under the new proposals is that while in the past eurozone members had to keep their budget deficits below a certain level, a European treasury will now be able to force them to make changes to their budgets to keep their deficits down.

Bankrate.com Suvey Shows People Do Not Save Enough 

A recent survey by Bankrate.com shows that consumers have insufficient savings.  28% of consumers have no emergency savings and 2/3s have less than 6 months of savings.  The numbers also show that this is closely tied to education level.  The survey also acknowledges that for the last few years people have probably been forgoing savings to liquidate their debt.  I find these types of demographics to be fascinating because regardless of "the opinions" you hear on the news, this is what is actually happening on the ground.

If people are actively retiring debt and then will begin to rebuild their savings, what does this say about economic growth for the next few years?  I would have to vote slow.

The article is in italics and the bold is my emphasis.

From Bankrate.com: 

Have Americans already forgotten the lessons learned in the financial crisis? The number of people with no money saved for emergencies has risen to 28 percent, up from 24 percent a year ago, according to Bankrate's Financial Security Index.

About 1 in 5 people are slightly better off, with enough savings in an emergency fund to cover less than three months of expenses, while 42 percent of those polled say they have at least three months' worth of cash saved.

Income and education matter

The general rule of thumb calls for enough cash to cover six months of living expenses. It depends who you ask, though. The recession prompted many financial advisers to boost that recommendation to 12 months' worth or more.

Not surprisingly, earning more than $75,000 per year vastly increases the odds of hitting the minimum recommendation of six months; 45 percent of high-income earners say they've reached or surpassed that mark.

Only 9 percent of these high earners say they have no rainy-day fund, compared to 52 percent of those earning less than $30,000.

A college degree is also fairly predictive of emergency fund savings: 41 percent of college graduates report enough savings to cover expenses for six months or more, versus 14 percent of those with a high school education.

Saving versus paying down debt

While Americans may be struggling to save money, the collective debt load is smaller than it was several years ago, particularly when it comes to revolving accounts such as credit cards.


Between 2008 and 2010, consumers significantly paid down revolving credit accounts, according to figures from the Federal Reserve's April report on consumer credit.


Rather than stocking household coffers with extra funds, consumers who are now lacking substantial emergency funds may have used extra money to service debt instead.


"While the debts are down quite significantly on a household basis from prior years' levels and the households are much better off, I believe that this drop in debts came at the expense of savings," says Robert Fuest, chief operating officer and head of investment research at Landor & Fuest Capital Managers in New York.


Now that debt loads are lighter, the new challenge is to build up savings to avoid falling back into a cycle of debt.

Breaking bad habits

Consumers are constantly barraged by marketing, none of which espouse living below your means and managing money responsibly.


"Many Americans used debt to fund about 20 percent of their lifestyle choices. They were running cash-flow negative, in essence," Fuest says.


Scaling back spending doesn't happen overnight, particularly in a society where the economy is powered by ever-increasing consumer demand.


It can take some time to change the mindset that leads to overspending, but there's an easy shortcut to boosting savings: automation.


"If you have an employer that can split out the amount that you are taking home and force-feed savings into an account that is out of sight and out of mind, I think that is one of the best ways," says Elliot Herman, CFP and partner at PRW Wealth Management in Quincy, Mass.
Alternatively, if your employer doesn't offer the option of splitting your direct deposit, an automatic transfer can be set up from your primary checking account to a savings account on the same day you're paid. The end result is the same; the money is spirited away before it's available to be spent.

Where to park your emergency fund

For most people, establishing an emergency fund is a process in which a small pile of savings gradually grows into a larger one.


Keeping emergency savings fairly liquid is important, but once the fund reaches critical mass, savers may want more yield than they can find in a savings account or money market account.


With a sizable pot of money saved, placing a portion into a short-term bond fund could be a good idea, according to Herman.


"I would be wary of some of the higher-yielding short-term bond funds; those could have minefields within them that we don't know about right now. I don't think they're worth the risk. But I think there is something in between those and an ultrasafe savings account that is higher quality and is worth the risk," he says.


Yield should be secondary to liquidity, though. In general, earning a decent return on your savings is less important than simply having funds at the ready.


In the recession, Americans saw "how fast things can change, and they change beyond your control," says Susan Hirshman, president of consulting firm SHE LTD and author of "Does This Make My Assets Look Fat?"


"The only person responsible for you is you. You really can't rely on anyone," she says.  With millions still out of work, home values still depressed and a fog of uncertainty around government-sponsored safety nets, there should be enough out there to scare people into saving.

 

From:  Bankrate.com/

Medicare - Summary of the 2012 Annual Report

Nothing is as boring as reading about Medicare benefits and costs.  However, nothing is as important either, because of the profound effect this will have on our future taxes.  The AIER has done a nice job of summarizing the 2012 Annual Report of the Medicare Trustees.  From AIER:

The article is in italics and portion in bold is my emphasis.

Don’t be fooled by overly optimistic projections. It’s even worse than you think.

The 2012 annual report of Medicare trustees presents a gloomy picture for those counting on Medicare assistance. Unless something changes, the Medicare trust fund will be depleted in the next 12 years.

This means that a 65-year-old who enrolls in Medicare today will lose services when he or she turns 77—an age below the average U.S. life expectancy, and one at which medical needs are usually high.

Troubling as it may seem, this projection is actually the best case scenario. It is based on optimistic assumptions that are unlikely to hold true.

Chart 1 below shows the annual report’s official projection of total Medicare costs as a percent of GDP. It reveals a rapid increase in Medicare costs relative to GDP over the next 25 years as baby boomers become eligible and enroll.

Official estimates assume that current laws and institutional arrangements will prevail for the projection period. But reality is likely to unfold differently, making official projections—and the government and household decisions based upon them—highly inaccurate.

To address these inaccuracies, the Office of the Chief Actuary of Medicare created an alternative trajectory of Medicare costs based on more realistic assumptions (see Chart 1).

The alternative projections show that unless substantial changes are made, Medicare costs will be significantly above official projections. This substantial increase in costs will necessitate changes in both Medicare benefits and taxes—an eventuality for which everyone should prepare.

Past projections of Medicare costs have been far off the mark. When Medicare was first introduced in 1965, the House Ways and Means Committee estimated that inflation-adjusted Medicare would cost about $12 billion by 1990. In reality, it cost about $110 billion. By 2010, the cost rose to around $523 billion.

The sheer magnitude of the difference raises the question of whether projections have any real value. This has serious implications for U.S. public debt. Unreliable projections also mean that individuals may have a hard time predicting their tax liability and the availability of government-sponsored health care assistance programs.

To understand the flawed assumptions in the official projections, it’s important to know that Medicare has two components. Hospital Insurance (Medicare Part A) pays for hospital stays, skilled nursing facilities, and hospice care for the aged and disabled. Supplementary Medical Insurance (Medicare Parts B and D) pays for physicians’ and other outpatient services and provides subsidized prescription drug insurance coverage.

Official projections assume that physicians’ reimbursements under Medicare Part B will be reduced by 31 percent starting in 2013. This reduction is currently called for under the Medicare Sustainable Growth Rate (SGR) formula first introduced in 1997.

The projections also assume that payments for most non-physician Medicare providers will decrease because of growth in economy-wide productivity, according to the provision of the 2010 Patient Protection and Affordable Care Act. The annual report’s estimates also depend on the proper functioning of the Independent Payment Advisory Board, also created by the Affordable Care Act, with a mandate to reduce the growth rate of Medicare costs.

It is unlikely that any of these assumptions will bear out in the future.

If health care costs grow at a faster rate than the economy does, the SGR formula is supposed to keep costs in check by cutting physicians’ payments. In every year since 2001, the formula has called for physicians’ reimbursement rates to be cut by 5 percent or more. But Congress has overridden this cut every year except 2002, fearing that doctors would stop accepting Medicare patients if their reimbursement rates decreased.

While Congress can reject recommended cuts, they do not go away. Instead, the law requires that postponed reductions be added to the reduction scheduled for the next year. Since reimbursement reductions have been delayed for a decade, the cumulative reduction scheduled for 2013 is very large—31 percent. It is unlikely that the Congress will allow Medicare payments to doctors to decrease by such a large amount. This makes projections that assume such a cut unrealistic.

The official projections also hinge on innovations in health care  delivery systems that are highly uncertain. The Affordable Care Act requires that annual payments for most Medicare services be moderated by the rate of increase in economy-wide productivity.

In practice, the efficiency of the delivery of health care services has never increased as fast as overall productivity. The productivity adjustment required by law would reduce the effective payments doctors and hospitals receive for treating Medicare patients.

This, in turn, could compromise Medicare beneficiaries’ access to medical care. For this reason, it is likely that the productivity adjustment will be legislatively amended or abandoned at some point. Actual Medicare costs will therefore be higher than the ones projected under the current law.

When Medicare spending per beneficiary exceeds specified thresholds, which is expected to happen often, the Advisory Board is charged with finding measures to reduce it. Since reductions in physicians’ payments and productivity adjustments are not likely to be implemented, the Board will have to find some other way to bring costs substantially down. But it is unclear whether the Board will be able to effectively design proposals to do this.

The more realistic alternative scenario created by the Office of the Chief Actuary assumes that Medicare physicians’ payments will grow at the rate of average U.S. health care spending. It assumes that Medicare providers might not keep their costs within the limits of reimbursement rates, leading Congress to increase rates. The alternative scenario additionally assumes that the Board will have limited ability to hold down Medicare cost growth rates.

Unsurprisingly, with these assumptions the future costs of Medicare come in much higher than the official projections suggest. As Chart 2 at right shows, under the alternative scenario costs for Medicare Part A will rise substantially above official projections beginning around 2027. Under official projections, Part A costs are expected to rise from 1.7 percent of GDP in 2011 to 2.7 percent of GDP in 2080. Under the alternative scenario, costs will rise to 4.1 percent of GDP in 2080.

No matter which projections we take, the trust fund for Medicare Part A will be exhausted in 2024. For Medicare to survive after that, costs will have to be covered by current tax revenue.

Under the official projections, we will need to collect an additional 1.4 percent of taxable payroll to keep Medicare Part A viable for the next 75 years. To cover the much higher costs projected under the alternative analysis, we will have to collect an additional 2.8 percent of taxable payroll in taxes.

In 2011, Medicare taxes amounted to 3.2 percent of taxable payroll. To cover future costs under the alternative scenario, taxes will have to be raised to 6.0 percent of taxable payroll—almost double their current level.

For Medicare Part B, the discrepancy between the official projections and more realistic alterative ones is even larger (see Chart 2). Under the current law, the cost of Medicare Part B is expected to rise from 1.5 percent of GDP in 2011 to 2.4 percent of GDP in 2040 and 2.5 percent in 2080. Under the more realistic scenario, costs of Medicare Part B will rise to 3.2 percent of GDP in 2040 and 4.4 percent in 2080.

Medicare Part B is covered by general tax revenue and by monthly premiums paid by enrollees. The premiums cover 25 percent of program costs. Taxpayers cover the remaining 75 percent.

If costs of Medicare Part B grow as the alternative scenario suggests, they will more than double relative to GDP by 2040. This means that the portion of general tax revenue devoted to funding Part B and the monthly premiums enrollees pay will have to double as well. This will be difficult to sustain without substantial changes in the tax structure.

In 2011, general tax revenue that went to fund Medicare Part B consumed 17 percent of all personal and corporate federal income taxes. If funding for Part B were to double (and if taxes remained relatively constant as percent of GDP), it would consume about 34 percent of all personal and corporate federal income taxes. It is doubtful that the government can devote such a large share of federal income taxes to just one program. Medicare will probably not remain in its current form much longer.

Some combination of increased taxes, increased Medicare premiums and co-payments for enrollees, and cuts in Medicare reimbursement rates (which may translate into effective reductions in benefits) will have to be implemented in the next several years. Everyone—those already enrolled in Medicare, those who plan to enroll in the next few years, and all taxpayers—should prepare for the coming changes.

Given that none of these actions are popular, politicians are likely to postpone them for as long as possible. But the ultimate deadline for making changes is the day the Medicare trust fund runs out. 2024 is only 12 years away.

The World Economy is Slowing Down

Interesting video on how the world economy is slowing down.  The individuals interviewed lay the cause of this slow down at the feet of the Europeans.

Marketwatch.com

5 Myths of Great Recession or the Second Great Contraction

This is a little long, but it is a very interesting statement that stands in sharp contrast to a lot of the popularly held opinions about the Second Great Contraction (term originated by Rogoff).  From CNNMoney.com

See a response to the blog above.

It's hard to believe, but it's been five years and a day since the U.S. financial system's problems surfaced, and we're still not even remotely close to being able to feel good about the economy. My admittedly arbitrary start date is June 12, 2007, the day the Wall Street Journal reported that two Bear Stearns hedge funds that owned mortgage securities were in big trouble. At the time, things didn't seem all that grim -- in fact, U.S. stocks hit an all-time high four months later. But in retrospect the travails of the funds, which collapsed within weeks, were a tip-off that a crisis was afoot. Problems kept erupting, efforts to restore calm failed, and we trembled on the brink of a financial abyss in 2008-09. Things have gotten better since then, but still aren't close to being right.

There's a long way to go before the economy, and people, recover from wounds inflicted by the financial meltdown. The value of homeowners' equity -- most Americans' biggest single financial asset -- is down $4.7 trillion, about 41%, since June 2007, according to the Federal Reserve. The U.S. stock market has lost $1.9 trillion of value, by Wilshire Associates' count. Even worse, we've got fewer people working now -- 142.3 million -- than then (146.1 million), even though the working-age population has grown. So while plenty of folks are doing well and entire industries have recovered, people on average are worse off than they were. Bad stuff.

How should you think about the past five years? What can we learn from them? And what can we as a society do to minimize the chances of a recurrence?

I've been writing about the financial meltdown and its aftermath almost continually since I joinedFortune the month after the symptoms surfaced. Now, five years into the problem, I find myself getting increasingly angry and frustrated watching myth supplant reality about what happened, and seeing fantasy displace common sense when it comes to fixing the problems that got us in this mess.

Ready? Okay, here we go.

Myth No. 1: The government should have done nothing.

There's an idea gaining currency that everything the government did, from the Troubled Asset Relief Program (the now infamous TARP) to the Federal Reserve's innovative lending programs and rate cutting, just made the problem worse. And that we should have simply let markets do their thing.

. . . . During the dark days of 2008-09, when giant institutions like Washington Mutual and Wachovia and Lehman Brothers failed and the likes of Citigroup, Bank of America, AIG, GE Capital, Merrill Lynch, Morgan Stanley, Goldman Sachs, and huge European banks were near collapse, letting them all go under would have brought on the financial apocalypse. We could well have ended up with a downturn worse than the Great Depression, which was the previous time that failures in the financial system (rather than the Federal Reserve raising rates) begat a U.S. economic slowdown.

You want to let big institutions fail? Okay, look at what happened when Lehman was allowed to go under in September 2008. (The Treasury and Fed insist there was no way to save the firm, though I wonder if they would have devised one had they not gotten tons of grief six months earlier for not letting Bear Stearns collapse.)

Lehman's collapse froze short-term money markets, making normal finance impossible. A run on money-market funds began when the Reserve Primary Fund, an industry pioneer, said it was "breaking the buck" because of losses on Lehman paper. Goldman Sachs and Morgan Stanley were about to fail because hedge funds and other "prime brokerage" customers began yanking their cash in response to prime brokerage assets at Lehman's London branch being frozen.

The federal government (including the Fed) had to front trillions of dollars and guarantee trillions of obligations -- a total I calculated last year at more than $14 trillion -- to stop the panic.

Lehman was a beta test for letting markets take care of problems themselves -- and it failed miserably.

Myth No. 2: The government bailed out shareholders.

The real beneficiaries of the government bailout of financial institutions weren't their stockholders -- it was their lenders.

Shareholders of troubled giant financial institutions that got TARP money and other goodies have suffered severe pain since June 11, 2007, the day before the problem surfaced (See the table at the bottom of the page). Losses exceed 99% at Fannie Mae and Freddie Mac and are 97% at AIG and 85% or more for other stricken institutions taxpayers bailed out. The S&P 500, by contrast, is down only 13%. Yes, a 100% loss would be appropriate for Citi, Bank of America, and AIG, which essentially failed. But their shareholders sure haven't emerged as winners.

It's patently unfair that lenders to these companies escaped unscathed, as did counterparties to AIG, which were paid with taxpayer money. Why did the government do the right thing at GM and Chrysler, where it forced creditors to take haircuts before financing the companies' reorganizations, and the wrong thing by bailing out creditors at financial companies?

The Treasury contends that whacking financial company creditors would have created more problems than it solved. "In a severe financial crisis," said a very senior Treasury official whom I agreed not to name, "the primary obligation is to prevent panics and the severe economic damage they cause to the innocent. In those crises, if you hair-cut the creditors of a systemically important institution, it's like adding accelerant to a burning fire."

One of the prominent dissenters from that approach is Sheila Bair, former chair of the FDIC (and a current Fortune columnist). Bair says that "there was not a market disruption" when bondholders of Washington Mutual Savings Bank suffered serious losses as the Federal Deposit Insurance Corp. seized WaMu in the biggest bank failure in history. My heart is with Bair. But I can totally understand why the Treasury and Fed acted as they did.

The bailing-out-creditors problem has supposedly been solved for future failures, as we'll see in a bit. But I have my doubts.

Myth No. 3: The Volcker Rule will save us.

Let's get one thing straight. Washington is unwilling to change the financial system drastically, the way it was changed in the Great Depression's aftermath. Rather than shrinking giant financial companies so that they're no longer too big to fail -- a process that Dick Fisher, head of the Dallas Fed, wonderfully likens to stomach-shrinking bariatric surgery -- we're trying to legislate the problems away. Hence a whole raft of new, tough-seeming -- but almost incomprehensible -- regulations.

The major one: the Volcker Rule, which is supposed to let insured banks do securities transactions on behalf of their customers but not speculate for their own accounts. That sounds great. But it won't work. As I predicted, differentiating between market making and speculating is proving impossible to define in a simple, enforceable way. The first version of the proposed rule ran almost 300 pages. Good luck.

Instead of the overhyped Volcker Rule, we need the severely underhyped Hoenig Rule. I've named it for Tom Hoenig, former head of the Kansas City Fed and current acting vice chair of the FDIC.

In a marvelous paper presented in May of last year -- to my regret, I didn't read it until this past May -- Hoenig (pronounced ha-nig) proposes breaking up banks by function, not size. It's so simple, it's brilliant. He would eliminate all trading and hedging by banks. If a bank wants to hedge its loan portfolio, it would have to buy a hedge, not make one. "You have to take those high-risk activities out of insured banks, not try to regulate them more," he told me.

He would allow banks to engage in investment-banking activities such as underwriting bonds and stocks -- so we're not talking about a return to the Depression-era Glass-Steagall rules that Congress repealed in 1999. It's a smart separation of high-risk from low-risk activities.

He would also alter rules governing money-market funds and change the way "repurchase" transactions are treated in bankruptcies. Money funds would have to mark their assets to market rather than guarantee holders $1 a share. That requirement, combined with the end of the implied federal support of money fund accounts (which the government guaranteed at the crisis' peak), would enforce serious discipline on fund managers.

The idea is to improve financial transparency and severely limit the "shadow banking system" that allowed the likes of Lehman, Bear Stearns, and Citi's "structured investment vehicle" subsidiaries to pile up money-fund and repo obligations that didn't show up on their parents' financial statements.

Hoenig is simple. And workable. And would infuriate Wall Street and its fellow travelers. It's too bad that Tom Hoenig's imprimatur is nowhere near as valuable in Washington as Volcker's is. Hoenig would probably fix "too big to fail." With Volcker, there's no hope.

Myth No. 4: Taxpayers are off the hook for future failures.

Dodd-Frank reform legislation passed in 2010 is being touted in Washington as a way to deal with future meltdowns of big financial institutions without risking taxpayer dollars or giving creditors a free pass.

It would work like this: The FDIC, using its new powers, would seize so-called systemically important financial institutions -- SIFIs -- and wipe out their shareholders. It would then convert the SIFIs' parent company debt to stock in a new SIFI at a severe discount, and raise cash to recapitalize the new SIFI either from the Treasury or from Treasury-backed loans. The Treasury would have first claim on everything the new SIFI owns. The Fed would be out of the game.

"We want to hold both shareholders and bondholders accountable," Martin Gruenberg, acting head of the FDIC, told me. "We've got the authority we need. Can we maintain stability and hold the company accountable to the marketplace? We've tried to develop the capability to do that as an alternative to a bailout."

They've tried -- but have they succeeded? I have my doubts. The FDIC's detailed proposals sound great. But like the Volcker Rule, it will turn into a game of financial Whac-A-Mole as SIFIs end-run the rules once they are made final. For instance, it took me about three seconds to realize that SIFIs could borrow at the operating-company level rather than at the parent company. ("It may be worthwhile to consider requiring a certain level of debt at the holding company," Gruenberg said.) There will doubtless be dozens of other ways around the rules.

I'm rooting for the FDIC. But my brain tells me that in this game, the financial moles won't stay whacked.

Myth No. 5: It's the government's fault.

Yes, there were plenty of reckless and immoral borrowers taking out mortgages they knew (or should have known) they couldn't afford. And yes, you can make a case that the federal government's zeal to increase homeownership levels was partly responsible for lowering lending standards. But the idea that the government is primarily to blame for this whole mess is delusional. It was the private market -- not government programs -- that made, packaged, and sold most of these wretched loans without regard to their quality. The packaging, combined with credit default swaps and other esoteric derivatives, spread the contagion throughout the world. That's why what initially seemed to be a large but containable U.S. mortgage problem touched off a worldwide financial crisis.

We've had more than enough shrieking and demonizing since this mess erupted in 2007. It's time that we stopped trying to blame "the other" -- be it poor people or rich people or Wall Street or community organizers -- for the problems that almost sank the world financial system.

It's time -- after five years, it's well past time -- for us to stop pointing fingers at one another, and to fix the excesses that almost sank us. The market sure didn't work very well. The government regulation solutions, like the Volcker Rule and Dodd-Frank "resolution rules," aren't going to work very well. We need common sense, like the Hoenig Rule, and markets (as opposed to a zillion regulators) that can enforce discipline on institutions that will not be too big to be allowed to fail.

Those, my friends, are the lessons of the past five years. Let's hope that at some point we'll finally learn them.

Big bank shareholders' financial pain

The Retirement Age Will Have to Rise

The retirement age in the developed countries will have to rise over the next 50 years.  People are living longer and they are healthier.  An issue that will have to be addressed in this dialogue about retirement is the "value of work".  I have met retired people in their 60s and working people in their 70s and the "working" people are usually far more vibrant.  There is a message there!

The article is in italics and the bold is my emphasis.

From CNNMoney.com:  

As life expectancy continues to rise, a new report suggests that governments need to raise the age of retirement in order to keep up.

The Organization for Economic Co-operation and Development said that by 2050, the average woman and man can expect to live roughly 24 and 20 years beyond retirement age respectively, up from 20 and 17 years in 2010. At the same time, retirement ages across many countries have stayed the same.

Without a change, the Paris-based economic think-tank said governments won't be able to pay for more people needing retirement funds for longer periods of time.

"Extending working lives in a situation of slowly growing or declining workforces should provide an important boost to economic growth in aging economies," according to the report, which was released Monday.

The United States could use a boost. Social Security has already begun paying out more in benefits than it takes in from workers' payroll taxes. The trustees of the Social Security program reported in April that the program projects a $165 billion deficit in 2012. Social Security could pay promised benefits in full through 2033, the report said.

Raising the full retirement age gradually to 70 years-old could help plug this deficit by reducing Social Security outlays by 13 percent, the Congressional Budget Office reported in January.

"With the fact that people are living longer, they should be partly responsible for meeting the cost of longer life expectancy," said Juan Yermo, head of the private pensions unit at OECD.

Today, the full retirement age in the United States is 66, up from 65 a decade ago. It is scheduled to increase by two months a year starting in 2017 until it reaches 67 in 2022. Meanwhile, 62 remains the age at which those who retire early can collect a percentage of their full benefits.

The OECD suggested, however, that "67 or higher is becoming the new 65."

"Extending the period over which you're contributing to the pension system would be less of a burden for everyone," Yermo said.

Experts say that the benefits of keeping people in the work force could spread beyond social security.

"People today in their sixties are not only living longer, but they're healthier," said Don Fuerst, senior pension fellow at the American Academy of Actuaries. "They can be a productive part of our society, and our economy needs for them to be productive .They could give our economy a boost."

But Fuerst and the OECD aren't expecting everyone to jump on board.

"Nobody wants to be told that they have to work longer to get the same pension," Yermo said. "But it's the inevitable result of the demographic challenges we're facing." 

The Recent Recession Destroyed 18 Years of Savings for the Average Family

The destruction of family wealth and income from 2007 to 2010 is unprecedented since the end of WWII.  Families lost almost a generation of accumulated wealth during that period.  All of this analysis from a recent Federal Reserve Bulletin.  The article is from CNNMoney.com:

The article is in italics and bold is my emphasis.

The average American family's net worth dropped almost 40% between 2007 and 2010, according to a triennial study released Monday by the Federal Reserve.

The stunning drop in median net worth -- from $126,400 in 2007 to $77,300 in 2010 -- indicates that the recession wiped away 18 years of savings and investment by families.

The Fed study, called the Survey of Consumer Finances, offers details on savings, income, debt, as well as assets and investments owned by American families.

The results, though more than a year old, highlight the marked deterioration in household finances brought on by the financial crisis and ensuing recession.

Much of the drop off in net worth -- to levels not seen since 1992 -- was attributable to a sharp decline in housing values, the Fed said.

In 2007, the median homeowner had a net worth of $246,000. Three years later that number had fallen to $174,500, a loss of more than $70,000 on average.

Families who reside in the west and south, where the housing market was especially hard hit by the recession, were worse off than their peers in the rest of the country.

Making matters worse, income levels also fell during the tumultuous three-year period, with median pre-tax income falling 7.7% as earnings from capital gains all but disappeared.

The loss of income and net worth appears to have impacted savings rates, as the number of Americans who said they saved in the prior year fell from 56.4% in 2007 to 52.0% in 2010 -- the lowest level recorded since the early 1990s.

At the same time, some families were able to escape from debt, as the share of families with debt decreased slightly to 74.9% over the three-year period. Credit card use was down, and the median account balance fell 16.1%.

Meanwhile, families who did report carrying debt showed little change in the degree of indebtedness over the period.

Lower interest rates helped keep debt levels down, but the number of Americans who had fallen more than 60 days behind on debt payments still grew from 7.1% to 10.8% in 2010.

The report also indicated that families with more assets at the start of the recession were able to retain more of their net worth than less fortunate families.

Families in the top 10% of income actually saw their net worth increase over the period, rising from a median of $1.17 million in 2007 to $1.19 million in 2010.

Meanwhile, middle-class families who ranked in the 40th to 60th percentile of income earners reported that their median income fell from $92,300 to $65,900 over the same time period. 

Consumer Loans are Down Except for Student Loans

In spite a reduction in consumer borrowing student loans continue to increase.  I am sure it is some type of "can't find a job then go to school" coupled with the cost of college is increasing. By the way, serious delinquency, that is 90+ dpd (days past due) is now 8.69%.  Fairly serious delinquency problems.  What happens when the students graduate and they cannot find a job?  What happens when they pay too much for college and they cannot afford the debt?  When happens when they graduate in a major they do not like?  A lot to think about before one takes on that much debt.  This article is from the Federal Reserve Bank of New York - "right from the horses mouth".


Article is in italics, the part in bold is my emphasis.

In its latest Quarterly Report on Household Debt and Credit, the Federal Reserve Bank of New York today announced that student loan debt reported on consumer credit reports reached $904 billion in the first quarter of 2012, a $30 billion increase from the previous quarter.  In addition, consumer deleveraging continued to advance as overall indebtedness declined to $11.44 trillion, about $100 billion (0.9 percent) less than in the fourth quarter of 2011.  Since the peak in household debt in the third quarter of 2008, student loan debt has increased by $293 billion, while other forms of debt fell a combined $1.53 trillion. 

The New York Fed also released historical student loans figures, by quarter, dating back to the first quarter of 2003¹ as part of this quarter’s report.  These data show that student loan debt has substantially increased since 2003, growing $663 billion.  Outstanding student loan debt surpassedcredit card debt as the second highest form of consumer debt in the second quarter of 2010. 

“Student loan debt continues to grow even as consumers reduce mortgage debt and credit card balances,” said Donghoon Lee, senior economist at the New York Fed.  “It remains the only form of consumer debt to substantially increase since the peak of household debt in late 2008.” 

Additionally, 90+ day delinquency rates for student loans steadily increased from 6.13 percent in the first quarter of 2003 to its current level of 8.69 percent.  They remain higher than that of mortgages, auto loans and home equity lines of credit (HELOC).²  90+ day student loan delinquencies were at their peak during the third quarter of 2010 at 9.17 percent and are the only form of those delinquencies to increase this quarter (by 0.24 percent). 
 
The New York Fed’s latest Quarterly Report on Household Debt and Credit also includes data on mortgages, credit cards, auto loans and delinquencies.   

Other highlights from the report include:

• Mortgage balances shown on consumer credit reports fell again ($81 billion or 1.0 percent) during the quarter. 
• Mortgage originations, which we measure as appearances of new mortgages on consumer credit reports, rose to $412 billion and are 17.4 percent below their first quarter 2011 level. 
• Credit card balances, at $679 billion, were 21.6 percent below their fourth quarter 2008 peak of $866 billion. 
• The number of credit inquiries within six months–an indicator of consumer credit demand–declined slightly, 0.5 percent, and is now 15.5 percent above its first quarter 2010 trough. 
• Auto loan originations rose 2.1 percent in the quarter, to $72 billion, and are 43.6 percent above their trough level in quarter one of 2009. 
• About $1.06 trillion of consumer debt is currently delinquent, with $796 billion seriously delinquent (at least 90 days late or “severely derogatory”). 

Click on the graphs to enlarge.

The Unemployment Could Go Down in the Near Future and This May not be a Good Thing

One of the more misunderstood and misrepresented metrics used today is the unemployment rate.  People "yak" about it all the time, but do not understand how it is calculated and how it should be interpreted in terms of the economy.  If the rate goes down is this a numerator or denominator effect?  You have to look at the raw numbers.  Is the unemployment rate a leading or lagging indicator?  Actually it is both depending where you are in the economic cycle.  At any rate, the following from CNNMoney.com is interesting.  The author understands the numerator and denominator effect.  

The article is in italics and the bold is my emphasis.

The unemployment rate could fall in coming months, but don't get too excited.

It won't necessarily be a sign the job market is improving.

More than a half million long-term unemployed people are losing their federal extended unemployment benefits. And when the checks stop coming, one of two things are likely to occur: They'll take any job they can get to stay afloat financially or they'll drop out of the labor force completely.

Either way, they won't be counted as unemployed anymore.

The federal extended benefits program has provided the jobless with up to 20 weeks of unemployment checks after they've run through their state and their federal emergency benefits, which together last up to 79 weeks.

But the extended benefits program is expiring throughout the country as the economy improves. To be eligible for these payments, a state must show that its unemployment rate is at least 10% higher than it was in at least one of the past three years. And state unemployment rates have been dropping as the jobless find new positions or exit the workforce.

More than 400,000 people have already lost these extended benefits, while more than 115,000 more will see their payments disappear over the summer. These folks join many others who simply exhaust their unemployment insurance.

Some of those who lose benefits will continue to look for jobs and be included in the unemployment rate.

But others won't have the luxury of being choosy. They'll take whatever they can get, which will put them in the "employed" category.

"It will encourage more people to take jobs that may not pay as much," said Lynn Reaser, chief economist with the Fermanian Business & Economic Institute at Point Loma Nazarene University. "They won't wait as long to accept a job."

On the flip side, others will just drop out of workforce entirely. Some may go back to school, while some will retire earlier than planned.

And still others may just stop looking for work, so they won't be included in the unemployment rate. To be eligible for jobless insurance, you must be actively searching for a job, a task they won't have to continue if their benefits expire.

The unemployment rate could drop by as much as half a percent over the next year due to the loss of these benefits, said Mark Zandi, chief economist of Moody's Analytics.

He thinks the cessation will force more younger workers to take available jobs, which is a good thing.

"It would be nice if the unemployment rate were falling because of straight-up job creation," he said. "But at this point, it will be more of a plus than a negative."

The unemployment rate has already lost some of its usefulness as a measure of job market health. It held steady at around 9% for most of 2011, before dropping to 8.1% in April. It notched up to 8.2% last month.

But some of that improvement is due to a shrinking labor force. In April, only 63.6% of Americans over age 16 participated in the labor force, the lowest rate since 1981.