This Is How Screwed-Up the US Pension System Is
The comments below are an edited and abridged synopsis of an article by Simon Black
Last year, Morningstar published a report concluding that most people can either save money for retirement or save money for their kids’ education, but not both; parents have to choose between their own future, or their children’s future.
According to Federal Reserve data, university tuition has risen an average of 4.5% per year since 2000, so university is twice as expensive as it was at the turn of the century.
This ‘inflation rate’ in tuition is more than twice as much as the growth in median household income (which has averaged just 2.2% annual growth since 2000).
For most of the last 10 to 12 years, interest rates have hovered near their lowest levels in 5,000 years.
Statistics show that the overall rate of inflation in 2019 was 2.3%, yet a 10-year government bond now only pays 1.7%.
So if you’re a retiree today and you put money into that same government bond investment, you’re guaranteed to lose money when adjusted for inflation.
This is why the CEO of Blackrock (the world’s largest money management firm), has said that today, people have to set aside three times as much money to save for retirement as their parents and grandparents did. It’s precisely because of these low interest rates.
Social Security is no comfort, either; it is massively and terminally underfunded.
These same conditions exist across most of the developed world, especially in Europe and Japan where interest rates are actually negative, and national pension funds are woefully short of cash.
With record low interest rates, you have to set aside more money than ever before in order to secure your retirement.
But simultaneously, with university tuition rising so much faster than household income, parents have to set aside more money than ever before to pay for their children’s education.
The old rules simply do not apply any longer. You can’t keep money parked in a savings account for 20 years and expect to have a comfortable retirement or a college fund for your kids… let alone both.