Ben Stein How Not to Ruin Your Life

A word of warning: This article is not going to contain any stock suggestions or tips. This column is warning of a different sort -- about the U.S. economy and the problems it faces.

I can summarize the shape of the U.S. economy by telling an anecdote. One of my closest friends is a lovely 45-year-old woman whom I will call Vivian. She has a good job in real estate, a lovely rented apartment in a city in California, a sweet little car, and elegant clothing. She earns about $75,000 a year.

Not Thinking Ahead

A few days ago, I asked her if she had considered variable annuities, bought with a very sharp eye on fees, for her retirement portfolio (please see "Income That Lasts as Long as You Need It"). She looked shocked and asked, "What retirement portfolio? Do I look that old?"

"No," I answered. "You look shockingly youthful. But what are you doing about your retirement?"

"Well, nothing," she said. "I don't even have any money in my savings account and barely any in my checking account."

"Do you have a 401(k)? Or maybe a pension? Or IRAs?"

"No," she said defiantly.

"Well," I asked, "with all due respect, how are you going to provide for your retirement?"

"I don't know," she said.

"I think you should try to save maybe $500 a month starting right now in a very carefully chosen variable annuity, or else in a broad index fund I will help you choose," I told her.

"I can't," she said. "I don't have the money. Besides, $500 a month is nothing. It wouldn't amount to a thing. I might as well spend it at Nordstrom's."

I took out my calculator and punched some buttons. "I beg your pardon," said I, "but if you save $500 a month and earn an average of 8.5 percent on it for the next 20 years, you'll have $316,000 by the time you're 65. It's not a lot, but it's a lot more than nothing, which is what you have now."

She stared at me incredulously. "Do you think I'm going to work another 20 years?" she asked. "No way."

"Well, then what are you going to live on when you stop work?"

"Social Security," she answered.

"That won't kick in until you're 66 or 67," I said, "and it won't be more than a pittance by then."

"I'm leaving,' she said. "There's a sale at Nordstrom's. I have to buy something to distract myself from what you've been telling me."

Depression-Level Savings Rate

Vivian's story is the story of America writ small.

In a nation in the midst of a major economic boom, we're running a budget deficit of very roughly $400 billion. Most of that is being loaned to us by the Chinese and Japanese and by the world's major oil-producing nations.

At this point, foreigners run a trade surplus with the U.S. approximating $720 billion a year. That is, we're buying from the rest of the world about three-quarters of a trillion dollars more each year than we're selling to the rest of the world. The difference is made up by foreigners lending us money and acquiring American assets, especially Treasury bonds. At this point, America owes the rest of the world at least $3 trillion more than they owe us, and the sum is growing rapidly.

It's still a small fraction of total U.S. wealth of about $65 trillion, but the trend is extremely worrisome.

In a time of prosperity, American consumers' savings rate is in negative territory, roughly -1.5 percent of total consumer earnings -- the lowest it has been since the nadir of the Great Depression in 1933.

It gets worse. Total consumer spending last year was very roughly $8.5 trillion. Of this, about $700 billion came from home refinancing -- in other words, borrowing, supported by a residential real estate boom that seems to be coming to an end.

The long and short of it: We're only able to sustain the spending level we need to keep the economy at high employment by going deeply into debt to mortgage lenders, foreigners, and our children, the future taxpayers.

We, as a nation, are a lot like my pal, Vivian. We're living from paycheck to paycheck -- and barely getting by at that.

Boomers: Pitifully Unprepared for Retirement

But it gets even worse: Medicare is going to be bankrupt in about 11 years and maybe sooner. Its actuarially computed liabilities for the balance of the century, brought back to net present value, exceed the total wealth of the nation, by some calculations.

We are, in a way, already bankrupt just from Medicare.

Now, in the face of these extreme imbalances and uncertainties, you would expect Americans to be saving like crazy to prepare for the future and its risks.

But instead, we're going ever deeper into debt.

And the part that makes it especially relevant is this: The Baby Boomers are the single largest part of the population by generations. They're about 78 million men and women. They will need a staggering sum to maintain their lifestyles after retirement, especially with pension systems that promise defined benefits collapsing.

But the Baby Boom generation is pitifully unprepared for the future. The average savings for Baby Boom households is less than $50,000, not including their homes. Even including the equity in their homes, it's not much over $100,000. And roughly half of all boomer households have either little retirement savings or none.

Sounding a Financial Warning

Yes, we have a fairly buoyant stock market, corporate profits are extremely high, and Americans could save more. The average Chinese worker, with average wages roughly one-twentieth of the American wage (and maybe less), saves 40 percent of his or her pay to prepare for retirement. The average American saves less than zero.

This is a society that needs to wake up to the gravity of reality -- and very, very soon. Let this be a warning: We are, in every way, living on borrowed time.